In November, PayPal, a large holding within the CSI funds, reported a positive set of third quarter results despite facing a large one-off negative driven by their recent banishment from the eBay website. Results included a 15% increase in active accounts, a 13% increase in revenue and a 4% increase in earnings per share. These numbers though were not enough to buck the downward trend in the shares, which have now seen a 30% fall in the last three months.
Although it is never easy to watch a stock price fall, we do think PayPal is, and will continue to be, a great company, but we also think that the shares had become overvalued. Despite believing this, we had not taken the opportunity to sell any of our shares. Whilst it doesn’t look so clever in this example, it continues to be our strategy to seek to invest money into high quality businesses where we see the shares available at a fair price (we purchased nearly all of our shares in PayPal in early 2020 for less than $120). We then allow those businesses to compound value over time and generally do not trim positions that we think are temporarily overvalued.
There are three reasons that we employ this strategy.
First, we are aware that good decisions take a significant amount of mental effort and we think that we are only capable of a certain number of good decisions per year. Buying and selling shares to try to generate incremental value means making more decisions. If we are hypothetically capable of 10 good decisions a year and we make 100, our success rate could be 10%. Still being capable of 10 good decisions, if we choose to make only 20 decisions, then our theoretical success rate would be five times higher; clearly a much better outcome.
Second, we think that valuation is a poor tool for timing and we do not think that it is correct to always conclude that if an asset is over-valued, its next move will necessarily be downward. It is useful to remind ourselves of John Maynard Keynes’ observation that, “the market can remain irrational longer than you can remain solvent”.
Third, we would add to Benjamin Franklin’s famous quote that death and taxes are life’s only guarantees. Costs to trade were as true (although maybe not in the same magnitude) in the 1780s for Franklin as they are for us today. We must be confident that any trading decisions that we make can generate a return large enough to justify dealing fees, the bid-offer spread and taxes associated with the trade.
When we suffer a disappointing return, as we have done with PayPal in recent months, we take a long hard look at our process; and learning from this kind of review will continue to prompt evolution in our strategy over time. But any adjustments that we may make regarding trading activity in the fund in future years will not come without great consideration and will always remember the advice of Charlie Munger that, “the big money is not in the buying and selling, but in the waiting.”
James Godrich, Fund Manager
James is the manager of the Coleman Street Investment Service
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
