This article is authored by MOI Global instructor Jean Pierre Verster, Portfolio Manager at Fairtree Capital, based in Johannesburg, South Africa.
The most expensive mistake in investing, in my opinion, is selling too soon (and, relatedly, thinking it is too late to buy), specifically in the case of long-term compounders, i.e. companies which grow their intrinsic value per share at an above-average rate over the long-term.
Even the best investors have painful tales related to this mistake, whether it’s Warren Buffett recalling not buying enough Walmart shares in the early days or Mohnish Pabrai describing how he sold his Amazon.com shares in 2002 after a quick 40% return, missing out on the next 11,500% for the 16 years thereafter (34.6% p.a. to date).
My own mistake, of a similar order, is selling Mr. Price shares (Johannesburg: MRP) at ZAR24 in 2008 after a 50% return within a few months. The share kept on going and reached ZAR260 in 2015, an opportunity cost of over 40% p.a. for 7 years. At the time, I had reasonable conviction that Mr. Price was still a long-term compounder, but I incorrectly thought that ZAR24 did not represent an attractive prospective return. How can investors avoid such expensive mistakes? To help me answer this important question, I performed the following analysis:
1. Rank the S&P500 constituents according to total change in NAV per share over the past 10 years (including distributions) as a proxy for change in intrinsic value*;
2. Compare this change to the total shareholder return (price change plus distributions reinvested) for these shares over the same period.
3. Rank the S&P500 constituents according to total shareholder return (price change plus distributions reinvested) over the past 10 years;
4. Compare this return to the total change in NAV per share for these shares over the past 10 years (including distributions) as a proxy for change in intrinsic value.
* This measure would be very close to the theoretical change in intrinsic value over a long period of time, barring a significant change in the estimated sustainable ROE of the company (which would lead to a materially different justified P/B ratio in the valuation process).
I recognise that the above analysis process is not necessarily academically robust (due to survivorship and other biases) but I believe it is sufficiently robust for the general conclusions reached, which are also supported by common sense. The analysis was done in both directions to address possible spurious correlation. For the sake of brevity, I will move straight to the findings:
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About The Author: Jean Pierre Verster
Jean Pierre Verster is the founder of Protea Capital Management, a South African-based investment management business which manages award-winning long/short and long-only equity portfolios. Mr. Verster was a Portfolio Manager at Fairtree Capital from May 2016 to June 2019. Prior to this, he was part of the team at 36ONE Asset Management for 6 years, collectively managing the largest single hedge fund in the country. Mr. Verster had previously been a Portfolio Manager and Analyst at Melville Douglas Investment Management and fulfilled various roles at the Standard Bank Group, including as a credit research analyst in its Global Markets Research division, a financial manager in the insurance services division and an internal auditor in the retail banking division. Since 2015, Mr. Verster is also an Independent Non-Executive Director and Chairman of the Audit Committee of Capitec Bank, a leading retail bank in South Africa. He is a Chartered Accountant and holds the CFA and CAIA designations.
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