Friday, June 08, 2007

Life at Sea

In our recent quarterly letter we explained that one of our core investing principals is that we will invest in only companies that we are willing to hold for 10 years with no option of getting out early. As you know, we do not hold all companies for 10 years, indeed we sometimes sell a company in only months, but the point is on the day we buy a company for the first time, the first question we ask ourselves is, "Based on everything we can see today, are we willing to hold this stock for 10 years." This is not just marketing hype. We mean it, and we learned about this concept from a very unusual source. Many years ago I (GCD) went sailing with a group of colleagues in the Caribbean on a beautiful boat named "Amazing Grace." The captain, who was named Tomas, had escaped from Poland when the country was still behind the Soviet Union's Iron Curtain. Since I was very interested in sailing at the time, he indulged me with tales of his own adventures around the world and what it was like to sail the high seas. I learned a lot about sailing in those few days, but through the stories of Captain Tomas, I also learned something about investing that I believe differentiates us in many ways from other firms. Over dinner one night, I asked the captain if he had any suggestions about what size boat he would recommend if I wanted to get into sailing. He just looked at me and laughed. He said "I have only one rule about boats. I will not set foot on any boat that is going more than 10 meters from shore, on which I would not be willing to spend the night." The dazed look on my face must have convinced him that I did not understand what he was talking about, so he continued. "The thing you have to remember is that sailing is as much about the weather as it is about the boat or the water. Great sailing weather is very close to dangerous sailing weather, and indeed, rough weather, by its very nature, comes fast and hard. In addition, boats that are built for speed are seldom built for sleep. I asked him if he literally meant that he would not set foot on a boat that he was not prepared to sleep on for the night. He answered, "I can't tell you the number of times in my life that I have been caught in rough weather just a few meters from shore. I could have practically thrown a rock and hit the shore, but the winds and the tides were against me, and I was forced to spend hours in high seas until the weather let up and I was able to come ashore. He continued,"Everyone assumes that a nice cruise across the bay, or down the river, or up the coast is what boating is all about. The weather is fine, the light is just right, the sea air is invigorating. Few people take into consideration how big the water is and how little the boat is, even in good weather. But when the bad weather comes, and it always does, in a moment they know they are in trouble, and their only hope is that they and their boat can endure the storm." I told him that his story reminded me of the stock market and people's reaction to it. I explained that too many investors I knew thought the greatest invention of the investment world was the ability to buy and sell, and as a result, they were willing to take a flyer on any idea because, after all, they could always get out. But the truth was when the storms hit the stock market, as they always did, they couldn't get out very easily and certainly not without great cost. Because of this, many investors either became "stuckholders," or traders. He said, "I figured out a long time ago, that my life would be on the water. Almost all of my eating, drinking, and sleeping would be done on the water, and as a result I became more and more particular about the kind of boat I would spend my time on. Gradually, I came to the idea I mentioned earlier of judging the boat by whether or not it and I could survive an overnight storm." He said, "Your story of the "stuckholders" and the traders reminds me of what I call the shorehuggers. They think they are sailing, but they don't have the boat or the experience to go into the deep, and thus, they don't know sailing at all." I asked him what was so important about getting into the deep water. What were the shorehuggers missing? "This little boat ( The Amazing Grace was 60ft. long) has carried my wife and me around the world. . ." He hesitated, and then said,"It's not something I can explain. You'll have to experience it for yourself one day." I never went into sailing. The more I thought about it, the more it reminded me of investing. I already had enough "weather" in my life, but as a result of the discussion I had with Captain Tomas, I began to think about investing differently. It would not happen for a few more years, in some ways not until Mike Hull and Rick Roop came aboard, but eventually, I began to build portfolios that could handle the storms, not try to run from them. Portfolios that ate well, slept well, and performed admirably. Portfolios that could take you around the world, or through the rest of your life no matter what the weather.