When I reflect on the year gone by and study my successes and my failures in an attempt to improve future results, I am reminded of the words of Winston Churchill, who said, "I am always ready to learn, although I do not always like being taught." No matter how good you may be at something, there will be times when you are just off your game. Denver Broncos fans can surely relate as their team has the best quarterback in the game, but Peyton Manning was intercepted four times last weekend against the Cincinnati Bengals. He had a poor game in spite of his skill, and I promise you he spent most of this week studying film to find and correct his mistakes.
As I look back over 2014, there are many lessons to be learned. One of the biggest takeaways is that, on balance, I am pretty good at buying stocks. I have learned to take the advice of Mr. Womack, Hetty Green and Andy Beal to heart and buy when prices are plunging and panic is in the air. I am, however, horrible at selling. I use a calculation of ongoing concern value loosely based on the Graham number and M&A values to set my target prices, and it is uncanny how many stocks almost reached that level this year.
WPX Energy (WPX) came within literally pennies of my valuation-based target, and I have a nice gain in the stock. Instead of cashing in a gain of nearly 70% I stuck fast to the discipline and watched the stock fall by about 60% or so before starting to inch back up. I had gains of more than 40% in Pan American Silver (PAAS) at one point in 2014 but now have a small loss in the stock because it never reached my valuation target. I am still up in Boardwalk Pipeline Partners (BWP) but I could have cashed a 50% or more gain in the stock at one point. I have no problem holding these names until they recover the lost ground, but I have to wonder if I am not too rigid in my selling practices.
I need to consider that one of the greatest investors of all time, Bernard Baruch, once quipped that he made his money by "selling too soon." Donald Smith has racked up a solid record by buying stock in the bottom decile of stocks as ranked by price-to-book value and selling when they appreciated out of the bottom 10% of stocks. In one of his last interviews, Ben Graham advised that stocks should be sold when they appreciated 50% or when they had been held for two years from the date of purchase. I am a horrible seller of stocks and need to spend time on this subject in 2015.
A lesson reinforced in 2014 is that patience almost always pays. I first wrote about Layne Christensen (LAYN) being a good stock on a pullback to less than 85% of book value back in late 2013. I love this company and they have a very bright future in my opinion. The water-drilling division of the company may eventually be worth more by itself than the whole company is trading for today. It is fantastic company but I waited impatiently until they stumbled on earnings in October and the price fell to my preferred valuation point. We are currently up a pleasant 65% in the stock and the win is entirely the result of patience.
I am also a big fan of West Marine (WMAR). I wanted the stock back in my portfolio but I forced myself to wait until it reached the right price before pulling the trigger. The company will see results improve markedly when the economy is again strong enough for boaters to feel comfortable buying the newest toys and accessories for their addictive hobby and lifestyle. For now, the company is holding its own and management owns a big chunk of the stock so they want to see a much higher stock price as much as I do. Patience has paid off nicely with a gain of a little more than 40% so far.
Patience when buying is the most difficult skill to learn as an investor but, fortunately, the market constantly reinforces the lesson. I am discovering, however, that I may need a bit more impatience when selling companies that I own. It is a subject that I will spend a lot of time pondering and would love to hear any thoughts that readers and fellow contributors may have on the subject.