When to Hold - the fine art of doing nothing
The art of long term investing appears to becoming rarer these days in a market where short term price action is the most focused upon investment input. However, we have always generated our most significant returns by holding onto our best stocks for the long term. Rather than reacting to short term price moves, the most successful action we have taken enroute to long term outperformance, has been to buy more stock on the way up. In this article we discuss when and how to hold onto a stock for the long term, as well as a key long term holding from DMX Capital Partners.
NB. This is the second part of a 3-part series covering when to Buy, Hold and Sell. Part One, “When to Buy” is available here.
The one reason to hold a stock in your portfolio
In our opinion, there is one main reason to hold a stock for long term – when the investment case is working.
Prior to buying any new position we recommend writing out the investment case in detail including all your current thinking regarding the quality of the company and any data which supports your view regarding the stock’s valuation. With these notes in hand, it becomes very clear in the future whether an investment case is on track or not. And from this point onwards, we will generally hold a stock for as long as the investment case is working. In our opinion, once you have done all the initial hard stock analysis work you really owe it to yourself to hold onto your investment for the long term gains…
Conviction, conviction, conviction
Conviction is what allows investors to hold investments for the long term. For us, conviction comes when we have concluded our analysis on a company and we can see the company’s long term vision as being clear and achievable, and importantly when we genuinely believe in management’s ability to execute. At this point we are generally feeling confident in our own ability to hold onto the stock for the long term opportunity. We believe most investors are more focused upon the short term price movements in stocks rather than their own conviction levels and the longer term implications – once you have completed your stock analysis, it is time to look inward to gauge your own ability to hold the stock for the long term. This is why investing is such a deeply personal journey.
How to hold: the fine art of doing nothing
The very nature of holding an investment for the long term is a passive act. In today’s wired world this is an extremely challenging concept for many investors to deal with as the default global mindset appears to be based upon taking action all the time. However, a short-term trading mindset is completely at odds with holding investments for the long term. The only way for investors to address this challenge is to train themselves in being passive, and remembering why they are invested for the long term.
We believe there are a number of strategies which can help develop an ability to hold stocks for the long term:
- Maintain detailed written notes of all your investment cases prior to investment, and then with regular updates over time;
- Build spreadsheets which include your financial expectations for each of your investments;
- Whenever possible, make contact with management at the companies you are invested in – ask questions and learn;
- Talk with existing investors who know your companies well – test your theories and challenge theirs;
- Spend limited time on websites like Hotcopper which attract people with a range of ulterior motives, and are effectively creating noise;
- Do not allow your view of the market to change your view of a stock investment case – remember, no one knows where the market is heading next.
- Subscribe for email updates on company announcement platforms or on the investor relations websites of each of your investments – this way you know when there is fundamental news in your stocks at the same time as the rest of the market – knowing you are as informed as possible will help you to ignore the daily stock moves
The one question we ask when an investment case is working
When an investment case is working, subject to valuation and portfolio exposure limits, the one and only question we generally ask ourselves is: should we buy more? We have generally found this to be a highly successful strategy even if we are buying at much higher levels than our original entry point.
Long term holding example: Joyce Corporation
We have been invested in Joyce Corporation (ASX:JYC) since we launched DMX Capital Partners over three and a half years ago.
We knew the company well at the time of investment and had high conviction levels that this was both a high quality company and a significantly under-valued stock.
One of the beauties of investing is that sometimes the most interesting investment opportunities are hidden in the most obscure places. In this case, it may come as a surprise to many that Joyce has a controlling interest in one of the fastest growing businesses on the ASX – Lloyds Online Auctions. Every day, Lloyds auctions hundreds of diverse items ranging from classic cars to high end jewellery to multi-million dollar major electronic brand clearances.
Lloyds offers powerful distribution and logistics capabilities, to enable its clients to efficiently dispose of surplus or unwanted products and stock throughout Australia. Clients include leading manufacturers and distributors disposing of seconds, damaged or end of line stock, insurance companies, leasing companies and financiers and government agencies. Lloyds has the infrastructure to quickly set up auctions for these clients and then market the opportunity to a wide national and sometimes international audience. A genuine network effect is at play here, as the larger the audience that Lloyds can attract, the more attractive it becomes to clients looking for an efficient distribution service at scale. With many of the auctions unreserved, Lloyds’ clients can quickly dispose of stock and avoid ongoing holdings costs.
Lloyds has been growing strongly in recent years. Auction sales have increased from $48m in FY16 to $88m in FY17 (+83%), and to $120m in FY18 (+36%). To put this into perspective, online retailer Kogan generated revenues of $400m (~40% growth) in FY18 and has a market cap close to $300m, almost 8x larger than Joyce’s current valuation. Lloyds is the largest seller of classic cars in the Southern Hemisphere, regularly achieving sale prices in excess of $200k per car, while it also achieves strong results in yellow equipment (mining/earthmoving) and portable buildings. Lloyds also has an emerging arts and collectables division. Having recorded 3 million registered views of its auctions, up 280% in the 6 months to 30 June 2018, Lloyds is very well placed to capitalise on its unique distribution capabilities as it becomes a leading online retail business.
Joyce’s other investment interests are also performing strongly. Kitchen Connection – one of Australia’s largest premium kitchen renovation companies, is also exhibiting strong growth. This business has experienced an average revenue growth in excess of 20% p.a. over the past five years. And the company’s smallest business unit, Bedshed, continues to take market share and offers unique bedding technology.
Interestingly, like most true old-economy businesses, Joyce has real assets on its balance sheet – mainly in the form of two substantial industrial properties.
We believe the value of Joyce’s interests in the Lloyd’s business, the Kitchen Connection business, the Bed Shed business and its industrial properties are well in excess of its current $40m market cap. Investing in a company that pays a healthy 8% fully franked dividend (which is increasing each year), has a strong balance sheet and interests in growing profitable businesses, stands strong as an attractive investment in our opinion.
With our conviction levels as high as there are, we are confident we will be able to hold Joyce Corp for many years to come...
Joyce Corp 5 year chart:
CONCLUSION: Holding the right stocks for the long term is the key to outsized returns in our experience. Once we have identified a stock to buy with a long term perspective in mind, we will hold onto the stock as long as the investment case is working as expected. If it is, our conviction levels will remain high and we will be able to hold on for the very long term. Joyce Corp is a great example of this type of opportunity in the DMX Capital Partners’ portfolio.
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