In one sentence: Phil explains short selling and why Buffett and Munger avoid it, uses Tesla as an example of speculation, and then answers whether a price rise changes the story: yes, because the event has resolved, so sell the companies that reached intrinsic value (unless they keep compounding fast) to build cash.
Key ideas
- Long versus short. A long trade buys a stock hoping it rises. A short sells borrowed stock, betting on a fall, and buys it back later. Phil's borrowed-Mercedes story shows the mechanics. [01:00–07:00]
- Even a right short can lose. David Einhorn shorted Green Mountain Coffee on accounting concerns. It fell, then rose past his entry when Coca-Cola made a deal. Phil counts this among the reasons to avoid shorting. [07:00–09:00]
- Three reasons the masters don't short. (1) Unlimited risk even when right, (2) Buffett's early experience breaking up a Nebraska company and seeing neighbours lose jobs, so he dislikes profiting from failure, and (3) each long dollar votes for a company's future, each short dollar votes against it. [08:00–12:00]
- Where shorting might fit. Fads, failures and frauds only. Phil doesn't trust himself to find fraud when forensic accountants and the SEC miss it. [12:00–13:30]
- Tesla as a speculation. Shorts argue it must deliver far more vehicles to justify the price, and that established carmakers are catching up. Phil says it fails his definition of investing because the future isn't certain enough. [13:00–17:00]
- Keep a risky bucket small. You can hold stocks you love and can't value, but cap the money so a loss can't hurt your retirement. [16:30–17:30]
- Technical arrows. Phil watches the MACD, the moving average and the stochastic as signals of how others view the market. He takes them with a "grain of salt" and says two are not enough to act. [22:00–27:30]
- Price is part of the story. Danielle writes the story without looking at the price. Phil says price is a component, though Danielle quotes the book's "least important, not unimportant" line about overpaying for a great business. [28:00–32:00]
- Selling at value, in numbers. Buying at half of value and doubling in three years is about 26% a year, in five about 15%. After that, a slow grower like a chewing gum company returns just its 4% earnings growth. [33:00–37:00]
- The story has changed. Once the event resolves and price reaches value, the reason to own it has changed. Phil would sell, put it on the watch list and buy again in the next recession. [38:00–40:00]
- The exception. Keep companies that compound fast or throw off large cash (Phil names Walmart in its growth years and See's Candies, bought for about $25M and producing about $65M a year). Don't sell what you'd gladly buy more of at today's price. [40:00–42:30]
How it maps to RuleOne
- The watch list and event watch are where a sold position goes to wait for the next drawdown.
- The stock page's moat and growth lines help separate the chewing-gum case (sell near value) from the See's case (keep).
- RuleOne doesn't offer shorting, and its screen only looks for buys.
Buffett, Munger and Graham links
- Buffett on his 20-punch card of lifetime ideas and on size as a drag on returns, which Phil uses to explain why he stopped selling and rebuying. Check the shareholder letters before citing them.
- Graham, The Intelligent Investor, chapter 1: investment versus speculation, matching Phil's treatment of Tesla.
- Munger's view that wonderful companies compound for a long time is the reason Phil keeps the exceptions.
Words to know
- Short selling: selling borrowed stock to profit from a drop, then buying it back.
- Covering: buying back a shorted stock to close the position.
- Long trade: a plain purchase.
- Speculation: buying without reasonable certainty of the future cash flow.
Try this
On /holdings/, sort your positions by price relative to sticker. For each, write which side of the line it is on: "growing fast, keep" or "re-priced, candidate to sell". Check whether you can name the event that created the discount and whether it has resolved.
Check yourself
- Why can a short seller lose even when the thesis is right?
Answer
A takeover or rumour can send the price far above entry, and losses on a short are not capped. - How does Phil answer "did the story change when only the price changed?"
Answer
Yes, because the event that created the discount has resolved and the price has moved to value. - Which companies does Phil keep even above intrinsic value?
Answer
Those growing or producing cash fast enough that you'd be happy to buy more at that price.
Short quotes
"Every dollar you short a company is a vote for it to fail in the future." (Phil, ~10:30, auto-transcribed)