POST OF THE DAY
The Gorilla Game
LTBH vs. LTBW Investing Strategies

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By paulphilp
February 27, 2001

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I posted a reply yesterday that I regretted. I was replying to a question about which stocks I would feel comfortable holding blindly for 12 months. I would like to clarify what I meant in my answer.

I was also prompted by several discussions about Long Term Buy and Hold investing strategies on other boards today. Somebody went so far as to say that LTBH is dead.

So, to clarify my response yesterday...

I think that we must make the distinction between LTBH - Long Term Buy and Hold investing strategies, and LTBW - Long Term Buy and Wish investing strategies. I think that many people mean the latter when they refer to the former.

LTBW - The idea that you can invest in a technology company, put the certificates in your safe deposit box, and come back in 5,10, or 20 years and collect your healthy returns. This is wishful thinking. I cannot think of a single technology company that has a greater than 50% chance of keeping its current market position over the next five years. Not one.

Another example of LTBW investing is 'the cool new technology' company. A new technology is invented that has tremendous potential and many possible applications. The LTBW strategy is to buy the first couple of companies that announce products with the cool new technology. Using this strategy, the astute LTBW investor, having spotted the personal computer trend early, would be holding shares in Commodore and Digital Research today.

The recent discussions about OFDMA technology and its benefits over CDMA technology will be very attractive to the LTBW investor.

IMHO, George Gilder has much strength, but he is a LTBW investor of the worst kind.

Technology markets are dynamic and they take time to mature. Even if you are not a strict Gorilla Game investor, waiting for a proven leader with proven solutions seems prudent.

What does LTBH investing strategy mean to me?

1) I will invest in companies that have the fundamentals that I consider to be important with valuations that I consider to be fair. The determination of which fundamentals matter and what constitutes a fair valuation will be the result of my research and due diligence (DD).

2) I will hold those investments for as long as the fundamentals are in place. I will not buy or sell based on market fluctuations. If, however, a company's competitive advantage is weakened or threatened by a new technology, or the demand for its products drops, or the management team executes poorly over time - I will sell the stock.

In order to manage my investments this way I will keep abreast of the company's performance and its competitive environment. I will revisit my investment decisions once per quarter. Once per quarter (and only once per quarter), I will sell companies where the fundamentals have deteriorated.

I will also only invest in companies that I can understand. If I do not understand a company's competitive advantage or the dynamics of its market, I probably should not buy it for holding. I recently eliminated BRCD and ITWO from my candidate list because I did not feel confident in my knowledge of their technology and their markets.

For me, Long Term Buy and Hold does not mean closing my eyes. Instead, it is a discipline that saves me from reacting emotionally to market moods and prevents me from chasing the sexiest new technology.

I think that there is a place for LTBW. Just keep in mind that it is speculating and not investing.

I have lost some money practicing LTBW speculating, and I am now training myself in LTBH investing.

Happy Hunting ...

Paul