Does Holding Equal Buying?

By Duan Yongping’s account, he once asked Buffett in conversation whether holding equals buying. Buffett said of course — it is a fact, not an opinion. But the researchers on Xueqiu have checked, and Buffett never said anything of the kind on any other occasion. What he did say was this:

In this year’s annual report I called Coca-Cola and Gillette invincible companies, and described how great they are — great businesses run by outstanding managers.

But I think you are best served by not treating my view as an unconditional recommendation to buy these companies.

Otherwise you may pay too high a price for them — at least in the short run.

There is always a risk: it can take a business years to grow into the price you paid. Even the greatest business can see its share price run ahead of its business performance.

So Buffett holds these companies and yet does not recommend buying them.

How, then, should we read this? I think the argument never ends because two key elements get overlooked: transaction friction costs and position sizing.

That holding equals buying is a fact rests on one basic assumption: that buying and selling shares carries no friction cost. Under that assumption we can run a simple thought experiment and come away with an extremely important perspective on jettisoning sunk costs. Suppose buying and selling cost nothing, and every evening after the close the system automatically sells your shares at the closing price, and before the open the next morning you must decide what to buy — what do you buy? If your decision was to hold the portfolio unchanged, then you should buy back exactly the shares that were sold, in exactly the same quantities. That is the whole meaning of holding equals buying.

On the effect of transaction friction, Munger gave a fine illustration at the 2023 Daily Journal annual meeting: a shareholder asked why Berkshire was bearish on bank stocks while the Daily Journal kept holding its bank stock. Munger said the Daily Journal’s bank shares were bought at a very low cost and carried a large unrealized gain; sell them, and 40% of the proceeds would go to the government as capital gains tax. So he would rather not sell.

Even without a capital gains tax, commissions alone bias you toward holding for the long term. With no friction cost at all, any small new development at any company we hold or watch — a change in fundamentals or in price — shifts our win rate and our payoff odds, and in theory justifies a small rebalancing. Once friction costs enter the picture, we rebalance only when fundamentals or prices move materially.

The “buy” in “holding equals buying” really refers to rebuilding the position under ideal conditions, not to adding to a position already held. Adding to a holding, or trading other positions in a way that shifts this holding’s relative weight, both amount to a new view of the existing portfolio.

So in the end, to settle whether holding equals buying in substance, we have to be clear about what holding is and what buying is — and those words carry different meanings in different contexts and in different mouths.

Yet more important than parsing the sentence: a value investor should learn to discard the pull of cost basis on his thinking and audit his holdings constantly. He may not trade often, but at the level of thought the comparison of assets never stops, because money never sleeps — and investing, at bottom, is nothing but the comparison of opportunity costs.