Whitney Tilson: Hot favourites won’t always turn out to be great winners

To this last point on buying and holding, the funds I co-manage have recently sold several long positions, driven by our belief that the odds of a significant market correction over the next year have increased substantially. We’re not predicting Armageddon, but we think the subprime train wreck is in its early stages and could have substantial effects on the world economy and credit markets.

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In light of this more cautious outlook we went through our portfolio, analysing each position and asking ourselves, “If our fund were 100 per cent cash today, would we buy this stock?” During times when our outlook is more sanguine, we sometimes hold 80-cent dollars – typically either in stocks that we purchased as 50-cent dollars and are waiting until they reach our estimate of intrinsic value, or in high-quality, growing businesses that are moderately undervalued, which we’re happy to own in lieu of cash at certain times. But in today’s environment, we prefer cash to anything but pound-the-table-with- conviction stocks.

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As a result of this exercise, we’ve closed or reduced positions in great companies such as Microsoft, Costco, Wal-Mart and Anheuser-Busch.

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Among the highest-conviction stocks on which we’re now more concentrated are: Target, McDonald’s, Fairfax Financial and – my personal pick to “last the next decade” – Berkshire Hathaway.