intothebreach

I realize the above quote may have been in jest. But if it may help anyone regarding the concentration discussion, here's how I personally came to gravitate toward increased concentration (I can be anywhere between 5 and 15 stocks, so not extreme by any measure). After under-performing my benchmark for a few years (S&P500), I did a fairly thorough analysis of what had worked well for me and what had really not. I came away with 3 conclusions: 1. my option plays were lousy because I was aiming for the fences (in most cases the common would have done much, much better); 2. I was losing money on what I'll call marginal positions (as in bordering, not leverage) because I did not research them well enough (both to justify the initial buy, but also to have enough conviction to stay the course when they ran against me); and 3. I was underinvesting in my best ideas, those I understood really well but failed to commit sufficient capital to really offset the first 2 categories. Simply put, I was trading too much instead of investing (but I sure learned a lot as this was in 2007-2008). So, at least for me, I believe that concentration actually decreases my overall risk as I need to feel a very good understanding of a situation, as well as an explanation for the dislocation between the price and value to invest a sizeable portion. I've also grown comfortable with low activity in my portfolios (which suits me better as my schedule itself tends to be very lumpy). A few examples come to mind: BRK in late 2008 when the notion that Buffett had invested in derivatives created a panic, JEF after the MF Global disaster and Egan-Jones botched analysis, AAPL in late 2008 and again in late 2012/early 2013. I quoted the above to add that in my case, concentration is more about discipline than guts, especially the discipline to do nothing if my criteria are not met. In this I (now) fully subscribe to Buffett's admonition to look at the downside first. I agree with Oddballstocks that it is more correlation than causality: at the end it comes from stock selection, concentration just magnifies the returns, good or bad. Your mileage may certainly vary, but I hope this may prove useful to some.

This is a very enjoyable thread and for me has also been useful as I've picked up a few things along the way (it also has none of the back and forth we see on some threads with 100+ pages). I personally have gravitated to be increasingly concentrated but I think we can all agree that different approaches can work provided that the underlying process is sound. With that spirit I'd like to suggest that since measuring returns, while the definitive metric, is by definition a lagging measurement that may or may not adequately capture the process side of the equation that it needs to be complemented by other metrics to provide a fuller picture. One thing I've started doing is measuring my "batting average" in terms of the proportion of buy decisions I've made in a year that closed with positive return, and also my average positive and negative returns. This is far from perfect as in some cases it is even more lagging, but I find it helps me question my process. There might be other useful measures, but so far they elude me... Happy Holidays to all, and many happy returns, in investing and in life!

It's been a good but unspectacular year, up 28% (31% for the corporate portfolio and 23% for smaller RSP/retirement account portfolio). What contributed positively: 1) BRK's huge year 2) Apple's run in 2014. I kept buying as it fell down from its 2012 high all the way to its April 2013 low, at which point I bought LEAPS (it appeared cheap to me, but I just got very lucky to be buying the options the day before it hit its lowest point). This was the only time I used leverage in the year (I only use options for these kind of situations, simply because I'm still shy from getting burned a few times before where I happened to be right on the stock, but lost money due to poorly conceived option plays... ) EDIT: 3) Forgot to mention the improvement in the exchange rate. The portfolios are all in USD but the returns get converted into CAD on the broken report that I'm quoting above. What contributed negatively: 1) Extremely poor timing finally moving out of my 5-yr SHLD position, just before it bounced back in a huge fashion 2) Selling out of STRA too quickly to raise cash 3) Small positions in resources such as BTU, RIG and TX (should have sold some even if multiples appeared cheap, not the first time and I suspect not the last I get caught in an economic cycle...) and WTW Fun fact: I decided in late 2012 to do a little experiment with a tiny portfolio (a pension plan from an earlier job that I'm unable to transfer into the others) and to either leave it in cash or invest it in an extremely concentrated fashion in my very best 1 or 2 ideas. This is up 81% this year due to the same factor as described above, still tiny only somewhat less so. I left this out of the above YTD returns (not that it would have made a big difference). By the way, I would like to thank those who take the time to post results despite having a negative year. It is much appreciated and very useful (and also congratulate them on having the ability to be honest with oneself). I'll do my best to follow the example next time it's my turn (I started investing in the fall of 2007, so I've definitely been there before; who said that experience is what you acquire just after needing it?).

Crazy you definitely are not (that is, unless you hide it extremely well : ) You could even say CoBF is somewhat of a screen in itself based on curated content. Personally I maintain some fairly straightforward quantitative screens not to generate new ideas, but rather just to make sure I can catch the most illogical moves of Mr. Market such as BRK losing a third of its value a while back, and so on. However, these screens are still applied to a pre-selected group of stocks that I decided to include over time and that I have some familiarity with (started many years ago with Morningstar's wide moats, but definitely evolved into something else over time due among other things to the influence of many of the posters here). Having said this, I find that generating ideas not to be the hardest part of the investing game, especially since only a few really solid ideas are required when investing in a concentrated manner. I'm getting off topic, but for me the most challenging part is knowing when to let go of a successful investment and moving on to new ideas. (And by the way Nate, we "ran" into each other in the past: I remember writing you after your post on Solitron to share the reasons I was passing on that one. It seems to be doing fairly well for you.)

In theory, there should not be any difference between the two, but in practice spin-offs usually have the edge. Past a certain size, bigger actually get worst due to complexity and loss of visibility creeping in, departmental infighting, etc. Very often, you also get bigger because the people in charge either want to build an empire, or are actually compensated for growth rather than more sensible performance metrics. Sometimes conglomerates actually hide value due to a hidden assets, or even potential spin-offs. Spin-offs actually have some structural advantages for investors due to forced sellers, less analyst coverage, a more focused management team that no longer have to fight for capital of departmental support, etc. (there is another thread where the benefits of spin-offs have been very well explained). However, just as you have Berkshire, Singleton's Teledyne and others, some conglomerates do function well, provided they have sensible management at the helm, just as some spin-offs are doomed from their get go due to debt loads, or poor business prospects. I have worked with very large Canadian and American businesses, and more often than not, bigger is unfortunately synonym with dysfunctional (dysfunctional can still be very profitable, just a far cry from what the true business potential would/should be.) In the end, it really depends on the perspective: bigger is often not a bad thing for management, but as an investor, I'll usually look first at spin-off before conglomerates.

Completed my AIG "value meal" with the 2017 LEAPs that started trading yesterday.

No harm in asking questions, especially with the quality of posters here. Others will surely able to develop on this better than I can, but in my view good capital allocation means a rational use of available resources, starting but not ending with free cash flow generated by a business. I include in this the ability to just say no and not invest because some cost of capital threshold has been crossed. A good example of rational use of resources would be companies buying back their shares when they are clearly cheap (i.e. priced under book value), and also holding off on similar purchases then their shares are expensive. Management burning cash on pet projects or to prop up their self-importance would be the exact opposite. Buffett has written many times on this topic in Berkshire's annual reports. My self-education in investing over the last 7 years has convinced me that, unless a business deals with people's lives (for example a hospital), its most important functions are hiring right and allocating capital as rationally as possible. And since that last part is extremely rare to be encountered in the wild, I'm really glad this thread was created. Happy hunting!

That one was just glorious! I actually laughed out loud at the Harvey's... I wrote what follows in the "What are you buying today" thread and it has absolutely nothing to do with the current thread, but thanks a lot for all the inputs on options & leverage, it's been appreciated and useful.

The Canadian Couch Potato has some interesting models that I've used in the past as a basic template to build one for my girlfriend. Those need to be adjusted for US investors, but it's far from a bad starting point. In the end, I ended up only with wide-market ETFs, most of them Vanguard due to their low costs (typically much higher in Canada than in the US). http://canadiancouchpotato.com/model-portfolios/ Word of advice for those considering this avenue, the keys are: 1. keeping the costs at their very lowest 2. making sure to include a fair mix of non-corrolated types of assets to make sure that when some zig, others zag (bond vs stocks vs reit for example) 3. rebalancing once a year (around tax preparation or year-end makes sense) 4. and especially sitting on your hands and resisting the temptation to tweak it from time to time (probably the hardest part for a lot of people!) (5. for Canadian investors, do not select US-denominated stocks or ETFs within an account that automatically exchanges USD back to CAD, or better yet get an account that can hold USD)

Recently increased positions in AIG stock and to a lesser extent Warrants. Waiting for the 2017 leaps to arrive next week to turn this into a "value meal"... (By the way, thanks to ERICOPOLY for his numerous inputs on options as leverage -- went through the whole AIG thread yesterday specifically for this reason. The pages count in the BAC thread was just too intimidating : )

I think the key points have been covered for the original question, but I'll offer this summary of the structural advantages of (many) spin-offs: - Forced selling due to restrictions from funds receiving the spin-off from the parent - Management focused on what is usually a much simpler business - Often a management team better aligned with shareholders' interest - Freedom from corporate inefficiencies and bureaucracy; for example no longer having to compete for capital against other divisions or business units, or going through months of a corporate budgeting process, etc. - Usually very limited analyst coverage for the new firm, creating pockets of market inefficiencies Two key things to watch for with spin-offs that come to mind: 1) make sure the spin-off is a viable business (i.e. not loaded with an unmanageable debt from the parent), and 2) verify that management is incentivized to do the right thing. DPS and PSX are two very good examples of extremely interesting and profitable spin-offs (caught the first, snoozed on the second...) By opposition (could this be the "invert" someone was looking for earlier?), IPOs often have similar structural disadvantages (often priced at top of range, motivated "rich on paper" owners looking to sell as soon as lock-up expires, tons of media/analyst coverage, etc.)