The idea of good enough flies in the face of the belief we have absolute control over our investment results. We don’t have control but want to believe we do because the alternative — being out of our hands — can be unsettling.
That feeling leads people to obsess over the minutiae in the market and economy, in order to predict the future, so they can perfectly time the market turns, and maximize returns.
In reality, investing is messy. Perfection is a lofty goal doomed to failure because mistakes and being wrong are part of the process. So is dumb luck. And bad luck.
Good enough investing accepts the messiness up front. Smart investing strategies are built around it, by accepting the role probability plays and, given time, swings success in their favor. The best outcome isn’t necessarily the best return, but a favorable return.
Marty Whitman explained his version of good enough investing in a 1996 shareholder letter. He boiled it down to knowing the limits of his skill and being less active. Once his “safe and cheap” criteria were met, it came down to good enough.
The Buy Side
The TAVF analysis of the value of a common stock stops at the point where we arrive at an opinion as to what we think a company is worth as a private business or a takeover. In contrast, all other types of analysis of passive investments of which we are aware, from Graham & Dodd fundamentalism to academic finance, have as the goal of their analysis a determination of the price, or prices, at which they believe the security will sell as it is traded on a stock exchange or on NASDAQ. We do not try to predict stock or bond prices or stock or bond market levels because we are unable to do so. Further, we think the same is true for almost everybody else in the financial community.
Ignoring the prices at which a security might sell is the very essence of good enough investing for a passive investor such as TAVF. We know enough about the price mechanism prevailing in securities markets to conclude that, however low we think prices can go for a security held in the portfolio, those prices can in fact, go a lot lower. Provided that the business seems to have staying power, and the security’s price seems to represent a discount from private business value, TAVF will average down as part of good enough investing. No attempt is ever made, nor could it be made while ignoring stock market factors, to buy at, or near, a bottom.
Control investors, from Warren Buffett to Richard Rainwater to Carl Icahn, are very TAVF-like. They focus on underlying business values and do not clutter up their analysis with stock market considerations such as forecasting a market outlook, an interest rate outlook, predictions of macro factors such as Gross Domestic Product or unemployment rates. Like the Fund, in company analysis they worry little, or not at all, about near-term earnings trends, dividend rates, sponsorship, industry identification, or price/earnings ratios. Rather, the focus is on long-term outlooks and the ability to finance operations and transactions.
In some other types of passive analyses, private business value is one component of an overall analysis… Major emphasis is on stock market factors such as reaching judgments about the outlook for the general stock market and interest rates simply because the goal of the analysis is to reach a judgment about where the common stock of a going-concern will sell. Rarely will an analysis focus on viewing a business as a takeover candidate.
The vast majority of stock market analysis, though, involves considering a whole host of other factors and ignoring completely any analysis of what a business is worth…
The Sell Side
As a buy and hold investor, the Fund only infrequently sells securities out of its portfolio. The triggers for a voluntary sale by TAVF in the open market are that the initial analysis was faulty, business conditions change (especially a portfolio company dissipates a previously strong financial position) or the security becomes grossly overpriced.
I think there are a number of good reasons to justify this rather inactive, good enough, approach to the sell side. First, corporate values are dynamic, ever changing. If TAVF is investing in the right companies, fundamental values ought to be increasing over time as the businesses retain the fruits of past corporate prosperity, both in terms of increased financial capabilities and increased operational strengths.
Second, the analytical techniques used by TAVF seem a lot better suited for identifying attractive buys than they are for identifying appropriate sales. I’ve had a lot of experience, so to speak, owning securities for five years which I then sold, after the price had doubled, to a buyer in whose hands the price tripled within the next six months. Now the Fund tries not to sell in the first place.
Third, how aggressive one ought to be as a seller depends in part on whether the pool of funds being managed is of constant or decreasing size on the one hand, or an expanding sized portfolio on the other hand. Pressures to sell tend to be less when portfolio size is expanding simply because new funds are being made available to create new positions or to add to old positions…
Finally, in good enough investing there is a tendency to have a multiplicity of investment objectives, rather than just one objective. Maximizers seek the best possible, risk-adjusted, total return attained consistently. Good enough investors, on the other hand, can find that an investment is quite satisfactory if it provides either a minimum yield to maturity or a high level of total return, a gradual increase in underlying value whether or not such increments are reflected in market prices consistently, or either an above-average yield to maturity for a performing loan or profit from participating in a Chapter 11 Reorganization involving defaulted loans.
Deep down, I’m not convinced that TAVF’s relaxed, good enough, style of investing is not also maximizing performance. Maximization exists where the participant tries to earn as much as can reasonably be earned under the circumstances. As for the Fund’s circumstances, we hopefully bring a lot to the table in analyzing underlying business values. We bring nothing to the table in trying to predict the prices at which securities will sell in trading markets. Maximizing for us in the common stock arena ought to continue to mean trying to acquire interests in companies with impeccable staying power at prices that represent meaningful discounts from private business values or takeover values.