I have been reading Shad Rowe’s prose since the 1970s when he wrote a column for Forbes’s magazine. More recently Shad and I met in his Dallas office to discuss the markets, stocks and his investment style. That was about six or seven years ago. Shad is one of the best long-term investors I know, so I thought his August investment letter to the clients of Greenbrier Partners was particularly instructive. He wrote:

Through August, Greenbrier Partners, Ltd. (“Greenbrier”) is up 23.6% net of expenses and profit reallocation (this is an unaudited number). In comparison, the S&P 500 is up 18.3% including dividends.

“He really doesn’t Do anything. All he does is buy and hold. What I need are people who make money” is a comment I occasionally hear from arithmetically challenged investors. I plead guilty. What we attempt to do is simple – identify great companies that fit within compelling long-term themes . . . companies that do something better, faster and cheaper FOR instead of TO their customers, with balance sheets big enough to go after huge opportunities. We attempt to buy shares at reasonable prices, and then hold on (hopefully forever). This is a strategy that should be easy to replicate and borrows heavily from T. Rowe Price, Peter Lynch, John Train, Philip Fisher, and Warren Buffett to name a few. It is a strategy that also flies in the face of conventional Wall Street wisdom. (We do also spend a considerable amount of time checking and rechecking the validity of our theses.)

I have noticed that the truly great companies and great managers generally get better over time. I have also noticed that most investors tend to sell their winners if they meet short-term objectives (12-month price target, financial projections, whatever). And so, they sell, and then they have to start all over, thus damning themselves forever to money manager underperformance hell. The opportunity to buy the shares of a great company at a fair price is rare. So, selling a great company because it surpasses an arbitrary price target after six, 12, or 18 months seems on its face to be counterproductive and tax-inefficient.

Losers seem to take care of themselves, as their stock prices drift off into oblivion. Mediocre investments are more difficult, and they represent an opportunity cost. We believe that investors should be careful with their losers, but we think they should be especially careful with their winners – selling too early is the most overlooked detractor from long-term outperformance.