Why Portfolio Turnover Matters

Consider two $100,000 portfolios with the exact same return

 
 

Portfolio A

  • High Turnover - selling all positions annually
  • Annual Return: 12% over 20 years
  • Taxes paid each year due to portfolio turnover

End Value:

$625,477

 

Portfolio B

  • Low Turnover - holding all positions for the entire duration
  • Annual Return: 12% over 20 years
  • 20% Long-term Gains tax paid at the end of 20 years

End Value:

$964,629

 
 

The end value of Portfolio B is 1.5x more than Portfolio A, simply because of a disciplined approach to buy and hold businesses for long periods of time. 

 
Read disclosures here

Information regarding how Portfolio A and B values are calculated are available upon request. Please contact info@selectivewm.com for more information

In economic terms, the liability [of deferred taxes on capital gains] resembles an interest-free loan from the U.S. Treasury that comes due only at our election.
— Warren Buffett, CEO, Berkshire Hathaway

Investing in the circle of competence

Selective is committed to being invested within its circle of competence. An investment in a select number of thoroughly understood, high quality businesses is much better than continuously purchasing new companies. Warren Buffett states that an investor's goal, "should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now" (Berkshire Hathaway, Chairman's Letter, 1996). 

 

Selective sale discipline

Selective's prefers to never sell companies that have been purchased. This position allows enjoyment of the benefits to owning a successful businesses over long periods of time. However, there are instances where a business is sold due to one of the following reasons:

  • the business has been called away
  • the business has been acquired
  • the competitive position of the business has disintegrated
  • the market price of the business has greatly exceeded the estimated intrinsic value