Your 2014 portfolio return

[EliG]

I'd like to once again caution against envy on this thread, because I feel like I can see it building up even over the interwebs.

 

+1

 

"Someone will always be getting richer faster than you. This is not a tragedy." -- Munger

[berkshire101]

I'd like to once again caution against envy on this thread, because I feel like I can see it building up even over the interwebs.

 

+1

 

"Someone will always be getting richer faster than you. This is not a tragedy." -- Munger

 

So true.  Envy is one those sins we should learn to remove.  As long as we reach our goals, who cares what others do right?

[merkhet]

I'd like to once again caution against envy on this thread, because I feel like I can see it building up even over the interwebs.

 

+1

 

"Someone will always be getting richer faster than you. This is not a tragedy." -- Munger

 

So true.  Envy is one those sins we should learn to remove.  As long as we reach our goals, who cares what others do right?

 

Another of my favorite Munger quotes is that "envy is the only sin that isn't any fun."

[oddballstocks]

I'd like to once again caution against envy on this thread, because I feel like I can see it building up even over the interwebs.

 

+1

 

"Someone will always be getting richer faster than you. This is not a tragedy." -- Munger

 

Because investing seems 'easy' you simply read and click buy/sell.  If Buffett can become a billionaire by sitting in a room why can't anyone else?  If some guy in an office in Kansas can do 65% a year why can't anyone else?

 

The thing is investing like anything else is part skill and part work.  Some investors are truly better than others, but it's hard to recognize this.  Compound that with the fact that investors are a competitive bunch.  So someone comes on here and says they've done 65% annually betting on a stock that'll go up and suddenly there's a bandwagon trying to replicate the strategy.

 

If I knew which stock in my portfolio would double each year why would I diversify?  I would invest 100% in it, but why stop there?  If you "know" something will double in a year why not mortgage the house and leverage into it at 200-300%+?  The problem is I don't know, and if I think I know I'm just fooling myself.

 

Yadayada mentioned that the key to Packer's strategy is to buy companies at low multiples.  To me this is the key to value investing.  I have never lost money on buying a company at 2-3x earnings or at a very low multiple of book value.  This is true earnings, not one time adjusted earnings.  Low multiples are the easiest way to make money, but it doesn't always take place in a year or right after a purchase.

 

So true.  Envy is one those sins we should learn to remove.  As long as we reach our goals, who cares what others do right?

 

[cobafdek]

I think of position sizing in relation to the opportunity cost of the diversification.

 

Congratulations on your spectacular returns, and thanks for taking the time to outline your thinking in detail, which, to a wide diversifier like me I find quite fascinating and original.

 

Does the Kelly Criterion fit at all in your thinking?  Take the simple-minded form x = [P x upside - (1 - P)]/upside, where x is percentage of portfolio.

 

If I were a concentrator, I'd be conservative and take P = .5.  If I found a stock that I thought could double in a year (upside = 2), the Kelly formula would allocate no more than 25% to this stock.  If I were more confident, say P = .6, this single stock would still be no more than 40% of my portfolio.

 

Is it the put option that gives you the confidence to think 100% probability of success to your single pick, in addition to your application of valuation principles?

 

I'm also interested in knowing whether these Kelly ideas were in your thinking 7 years ago, or whether it figured not at all in your process.  Either way, it's fascinating.

 

 

[jobyts]

How do you calculate the yearly portfolio return if you bought/sold stocks in the in-between months?

 

 

[jmp8822]

I think of position sizing in relation to the opportunity cost of the diversification.

 

Congratulations on your spectacular returns, and thanks for taking the time to outline your thinking in detail, which, to a wide diversifier like me I find quite fascinating and original.

 

Does the Kelly Criterion fit at all in your thinking?  Take the simple-minded form x = [P x upside - (1 - P)]/upside, where x is percentage of portfolio.

 

If I were a concentrator, I'd be conservative and take P = .5.  If I found a stock that I thought could double in a year (upside = 2), the Kelly formula would allocate no more than 25% to this stock.  If I were more confident, say P = .6, this single stock would still be no more than 40% of my portfolio.

 

Is it the put option that gives you the confidence to think 100% probability of success to your single pick, in addition to your application of valuation principles?

 

I'm also interested in knowing whether these Kelly ideas were in your thinking 7 years ago, or whether it figured not at all in your process.  Either way, it's fascinating.

 

I don't use the Kelly Formula, but do like the direction it points.  To someone who owns 50 stocks, I would ask, what is the downside risk of your portfolio in a market crash? 40% or 50% or more? Being diversified did not save you from a dramatic portfolio loss, while your estimated upside becomes much more average due to the diversification. The more stocks I add to my portfolio, the lower the average conviction of my portfolio becomes. In other words, if I bought my 8th favorite idea, by definition I don't feel as good about my 8th best idea as my 7th.  Thus I lowered estimated portfolio return because I was trying to lower individual stock risk, but I did not reduce market risk.

 

Also, I expect my highest conviction (1st) idea would actually have a worse average return because I would be thinking about the other ideas all the time as well.  I believe this would distract my thoughts enough that I would make more mistakes.  The more focused my thinking, the less likely I become to sell a loser just because it went down, or buy some of my 6th best idea just because it went up.  I would quickly lose track of when I was actually wrong versus the market just disagreeing with me. I only have so much emotional capital, and being wrong once is much easier than being wrong six out of eight times.  The two winners out of eight would not be much consolation to me.

 

The put option key. I would own one or two stocks with catastrophic put protection in-place in order to take less total risk than owning 50 stocks, not more.  I define risk as having less money five or ten years later than I should have had based on the risk of opportunity cost, market risk, and individual stock risk. For almost everyone, I would expect a put at a 50% loss strike price, or somewhere in that range, would be a necessity if you only own one stock. To be clear, you can control your losses with the put, which prevents you from "blowing-up" as people like to say. But again, if you own 50 stocks you could lose 50% in a market crash anyway.  Owning one stock, if you picked a good one, might also lose less than the market as a whole, for example 30%, whereas 50 stocks would likely be within a few percent of the 50% loss of the index. If I have valued a business properly and only own that one stock, I very well could being taking less net risk on average after factoring in the opportunity cost. The put prevents the "blow-up", while still allowing your best ideas to compound your capital.

[DanielGMask]

It doesn't matter if you buy or sell during the year, just check what was your portfolio's value at beginning of year and compare that with your end of year value and that's that. The thing that does matter is if you add or subtract money one or more times during the year, but that's also easy to calculate.

 

How do you calculate the yearly portfolio return if you bought/sold stocks in the in-between months?

[jobyts]

It doesn't matter if you buy or sell during the year, just check what was your portfolio's value at beginning of year and compare that with your end of year value and that's that. The thing that does matter is if you add or subtract money one or more times during the year, but that's also easy to calculate.

 

Actually I meant adding money into account. Say I have an monthly salary of 10K, and I need 7K for my monthly expenses, effectively I'm supposed to be adding 3K cash for investment every month. I might not have bought any stocks in the first 6 months since I could not find any opportunity. How do you include this 3K/month in the equation?

 

Your brokerage account might do the calculation based on the cash available on the brokerage account. But I might not have moved my cash from my saving account to my brokerage account until the opportunity arrived. When you calculate the yearly return, are the folks here adding the investable cash (3K/month in the example here) in the saving account as well?

[EliG]

Jobyts, google XIRR. It is available in Excel, Google Sheets and Open Office.

[randomep]

It doesn't matter if you buy or sell during the year, just check what was your portfolio's value at beginning of year and compare that with your end of year value and that's that. The thing that does matter is if you add or subtract money one or more times during the year, but that's also easy to calculate.

 

Actually I meant adding money into account. Say I have an monthly salary of 10K, and I need 7K for my monthly expenses, effectively I'm supposed to be adding 3K cash for investment every month. I might not have bought any stocks in the first 6 months since I could not find any opportunity. How do you include this 3K/month in the equation?

 

Your brokerage account might do the calculation based on the cash available on the brokerage account. But I might not have moved my cash from my saving account to my brokerage account until the opportunity arrived. When you calculate the yearly return, are the folks here adding the investable cash (3K/month in the example here) in the saving account as well?

 

 

 

I think the most rigorous solution to your problem is to consider each deposit as a separate virtual account.  All of your virtual accounts must have the same IRR (let us denote as R) over its lifetime, which is from when you deposited it to NOW.  And the R is the rate such that all your virtual accounts add up to your actual account balance NOW.

 

In your example you deposit 3k per month so say after 3 months you have 10k, then your R is expressed as

 

3*(1+R)^3 + 3*(1+R)^2 + 3*(1+R)^1 = 10

 

and the solution is R=6% per month or about 100% per year.  My solution R is a rough estimate using spreadsheet although there is a closed form solution for this geometric sequence.

 

I just plugged in the following into a cell in libreoffice (which should be compatible with excel)

 

=FV(1+R,3,-3,0,0)

 

and I tried various values for R until the result is closest to 10.  The second last term of the FV() formula is the initital condition, so you can also plug that in. 

 

This is the method I use to calculate my return over various periods of my investment career.  Let me know if you have comments or if I am confusing you....

 

[EliG]

Randomep, I found this very confusing. Why not use XIRR?

[cobafdek]

I don't use the Kelly Formula, but do like the direction it points.  To someone who owns 50 stocks, I would ask, what is the downside risk of your portfolio in a market crash? 40% or 50% or more? Being diversified did not save you from a dramatic portfolio loss, while your estimated upside becomes much more average due to the diversification. The more stocks I add to my portfolio, the lower the average conviction of my portfolio becomes. In other words, if I bought my 8th favorite idea, by definition I don't feel as good about my 8th best idea as my 7th.  Thus I lowered estimated portfolio return because I was trying to lower individual stock risk, but I did not reduce market risk.

 

Also, I expect my highest conviction (1st) idea would actually have a worse average return because I would be thinking about the other ideas all the time as well.  I believe this would distract my thoughts enough that I would make more mistakes.  The more focused my thinking, the less likely I become to sell a loser just because it went down, or buy some of my 6th best idea just because it went up.  I would quickly lose track of when I was actually wrong versus the market just disagreeing with me. I only have so much emotional capital, and being wrong once is much easier than being wrong six out of eight times.  The two winners out of eight would not be much consolation to me.

 

The put option key. I would own one or two stocks with catastrophic put protection in-place in order to take less total risk than owning 50 stocks, not more.  I define risk as having less money five or ten years later than I should have had based on the risk of opportunity cost, market risk, and individual stock risk. For almost everyone, I would expect a put at a 50% loss strike price, or somewhere in that range, would be a necessity if you only own one stock. To be clear, you can control your losses with the put, which prevents you from "blowing-up" as people like to say. But again, if you own 50 stocks you could lose 50% in a market crash anyway.  Owning one stock, if you picked a good one, might also lose less than the market as a whole, for example 30%, whereas 50 stocks would likely be within a few percent of the 50% loss of the index. If I have valued a business properly and only own that one stock, I very well could being taking less net risk on average after factoring in the opportunity cost. The put prevents the "blow-up", while still allowing your best ideas to compound your capital.

 

I think of risk as the possibility of permanent capital loss.  I don't mind temporary portfolio drawdowns.  Strike that - I welcome major temporary drawdowns, since my best years were either during major bear markets or during the 1-2 years after.  So maybe the more frequent, the better for me. 

 

I don't know the downside risk of my portfolio.  I think it is unknowable in precise quantitative terms.  All I know is that it is lower when I buy net-nets, low BV, low P/CF, etc., than if I buy high BV, high PE, highly leveraged companies.  I believe, and my past record and those of others show, that I stack the odds in my favor.  That's really all I try to do, and let the chips fall where they may.

 

I don't use the Kelly formula either, but I like it and understand the logic behind it.  I don't use it because I don't have the kind of edge needed to employ it.  I envy those who can do a deep dive and know a company inside and out.  I'm not even sure I'd have the ability even if I had majored in finance instead of medicine.  To me, all companies look pretty much the same, so I rarely think in terms of higher conviction ideas vs. lower.  Surely, I am mistaken here, but I don't go beyond a few pages in the 10K to gather a few time-tested value metrics.  Next to the risk of permanent capital loss, the biggest risk to me is thinking I can know a company as intimately as many of the other board members here.

 

There are many kinds of risk, but I think the one to worry least about is short-term quotational losses.  If there is a potential Achilles heel in your process, it might be an excessive concern with volatility.  I may be completely off base here, but just because volatility is quantifiable doesn't mean one can reliably protect oneself from it.  I lived through the 1987 crash, before I started investing, and maybe I've developed an irrational allergy to anything that sounds like portfolio insurance.  The analogy is weak, since you're applying it at the scale of an individual portfolio, and you clearly have the skill and judgment.

 

Nothing I say here is meant to say you should not be doing  what you are doing.  I'm just contrasting my subjective preferences and temperament with yours, as being at widely different poles but still fundamentally value investors.  I think our differences are primarily stylistic and matters of taste.  You seem to be both knowledgeable and thoughtful, and these traits are your best risk reduction tools.  Just reconsider the fear of volatility.

[randomep]

Randomep, I found this very confusing. Why not use XIRR?

 

Why? Cos I never heard of it!

 

There you go then, use =XIRR() !!

 

My concept is the same as XIRR but of course the spreadsheet functions does it all for you automatically! Thanks I learned something here everyday.

 

BTW regarding fidelity, I don't trust their IRR numbers at all because I have no idea what the inner workings of their computation. I have several accounts and I move money back and forth and I remember seeing something like 43% for my fidelity account, there is no way I got 43% the account!

 

 

[cknucks]

I'm somewhere in the 9~12% range, and I'll go back and compute the IRRs for all of the individual accounts and the total portfolio New Year's Eve.

 

That said, I've been been keeping track of performance of all of my brokerage accounts throughout the year and found something interesting to ponder for the future.  My 401K is my best performing account.  I have a handful of brokerage accounts, 3 of them with Interactive Brokers, where commissions are dirt cheap.  Meanwhile, my 401K, which is invested in stocks of my choosing, has commissions that are pretty expensive, $100 per trade.  The heirarchy of XIRRs for my various accounts are as follows:

1. 401k (only equities, no shorting, no options...trades here tend to be establishing a full position or selling a position in full completely)

2. IRA (dirt cheap commissions with covered call trades, no shorting)

3. After-tax Accounts (dirt cheap commissions, shorting, covered calls, naked puts, etc...)

 

The more I did this year, the lower my returns.  I'll keep track of this, but I'm of the mind that I need to simplify my approach and avoid overtrading going forward.

 

[frommi]

Academic studies have shown that there is no benefit of owning more than 20 stocks and you get the most benefits of diversification already with 5-8 stocks. I think Pabrai and Mecham do it this way,so thats probably not a bad idea. Mecham had at one point 50% in BRK, but he argued that BRK in itself is already diversified so that makes sense to me.

 

Everybody talks about Schloss as the most diversified investor of the past, but i found no evidence that he was not concentrated in some stocks. In one interview he mentioned: "Generally, we are happy with a 5% holding but we can go up to 10-12% if we really like it.". Yes he told the interviewer that he is in 100 stocks, but does it really matter when most of the positions are just to follow the stocks and get annual reports? In current times i don`t see a reason for these toehold positions anymore.

 

Putting 100% in one stock and securing it with a put option at 50% loss looks like a smart idea, but when you look at it its just a barbell strategy of holding 50% cash and 50% in a LEAP call option. Any way you turn it, you have to pay the cost of leverage which is bad when the stock goes sideways for a long time. So you have to have a pretty sick confidence that your catalyst will play out.

 

@jmp8822 You wrote that you had more than one stock going into 2008 and you averaged down into one stock, but have you realized that that was only possible because you were diversified before? Imagine your only 5$ position would have gone down from 5$ to 0.5$, you networth would have tanked by 90%. I can`t imagine how depressed i would have been at that point, losing savings of more than 15 years of hard work.

 

From what i learned from other investors is that a maximum limit of 10-15% for normal businesses and 25-40% for diversified businesses or funds is a good compromise between diversification and outperformance and that is what i am using for the future. But i don`t regret being very diversified when i started because that has given me a lot of opportunities to learn and at the same time reduced the magnitude of my mistakes.

 

[NewbieD]

+39.9% this year. Very happy. About 25% average leverage (margin, no derivatives) during the year, which is now gone. About 80% of the portfolio has been spread over 20 small cap stocks in Sweden, rest in Berkshire+Google.

 

Last year +71.0%. Portfolio is <1 million.

 

No idea what my turnover/fees are, but will check it out to be able to compare to you guys who calculated it.

 

Portfolio turnover was about 2.5. Transaction costs just over 1%. I'm pretty happy with this and don't see 1% as so high that I need to care a lot about it.

[BG2008]

Frommi,

 

I think the 50% put protection is a wise idea. It's all about protecting tail risk.  Tail risk by definition is often unknown and unpredictable, rigs blowing up, medical devices resulting in death etc. 

 

By definition, if you're putting 50-100% in 1 idea, most likely it is a 3X or a 2x with a clear catalyst.  Either the deep undervaluation itself is a catalyst or there is some sort of corp event that will re-rate the stock.  Personally, I wouldn't mind paying 10% cost of ATM put to hedge a 100% position.  I would also argue that the optimal put protection is likely somewhere between the ATM strike and 50% lower.  The rationale being that the upside is so large relative to downside that it should take care of itself over time.  Why buy the put and own the stock?  I think it gives you an undistorted view of your exposure.  Also, it's often much easier to enter/exit the common shares when needed.  Getting in and out of LEAPs can be tough in size.   

 

 

Academic studies have shown that there is no benefit of owning more than 20 stocks and you get the most benefits of diversification already with 5-8 stocks. I think Pabrai and Mecham do it this way,so thats probably not a bad idea. Mecham had at one point 50% in BRK, but he argued that BRK in itself is already diversified so that makes sense to me.

 

Everybody talks about Schloss as the most diversified investor of the past, but i found no evidence that he was not concentrated in some stocks. In one interview he mentioned: "Generally, we are happy with a 5% holding but we can go up to 10-12% if we really like it.". Yes he told the interviewer that he is in 100 stocks, but does it really matter when most of the positions are just to follow the stocks and get annual reports? In current times i don`t see a reason for these toehold positions anymore.

 

Putting 100% in one stock and securing it with a put option at 50% loss looks like a smart idea, but when you look at it its just a barbell strategy of holding 50% cash and 50% in a LEAP call option. Any way you turn it, you have to pay the cost of leverage which is bad when the stock goes sideways for a long time. So you have to have a pretty sick confidence that your catalyst will play out.

 

@jmp8822 You wrote that you had more than one stock going into 2008 and you averaged down into one stock, but have you realized that that was only possible because you were diversified before? Imagine your only 5$ position would have gone down from 5$ to 0.5$, you networth would have tanked by 90%. I can`t imagine how depressed i would have been at that point, losing savings of more than 15 years of hard work.

 

From what i learned from other investors is that a maximum limit of 10-15% for normal businesses and 25-40% for diversified businesses or funds is a good compromise between diversification and outperformance and that is what i am using for the future. But i don`t regret being very diversified when i started because that has given me a lot of opportunities to learn and at the same time reduced the magnitude of my mistakes.

[oddballstocks]

Frommi,

 

I think the 50% put protection is a wise idea. It's all about protecting tail risk.  Tail risk by definition is often unknown and unpredictable, rigs blowing up, medical devices resulting in death etc. 

 

By definition, if you're putting 50-100% in 1 idea, most likely it is a 3X or a 2x with a clear catalyst.  Either the deep undervaluation itself is a catalyst or there is some sort of corp event that will re-rate the stock.  Personally, I wouldn't mind paying 10% cost of ATM put to hedge a 100% position.  I would also argue that the optimal put protection is likely somewhere between the ATM strike and 50% lower.  The rationale being that the upside is so large relative to downside that it should take care of itself over time.  Why buy the put and own the stock?  I think it gives you an undistorted view of your exposure.  Also, it's often much easier to enter/exit the common shares when needed.  Getting in and out of LEAPs can be tough in size.   

 

 

Academic studies have shown that there is no benefit of owning more than 20 stocks and you get the most benefits of diversification already with 5-8 stocks. I think Pabrai and Mecham do it this way,so thats probably not a bad idea. Mecham had at one point 50% in BRK, but he argued that BRK in itself is already diversified so that makes sense to me.

 

Everybody talks about Schloss as the most diversified investor of the past, but i found no evidence that he was not concentrated in some stocks. In one interview he mentioned: "Generally, we are happy with a 5% holding but we can go up to 10-12% if we really like it.". Yes he told the interviewer that he is in 100 stocks, but does it really matter when most of the positions are just to follow the stocks and get annual reports? In current times i don`t see a reason for these toehold positions anymore.

 

Putting 100% in one stock and securing it with a put option at 50% loss looks like a smart idea, but when you look at it its just a barbell strategy of holding 50% cash and 50% in a LEAP call option. Any way you turn it, you have to pay the cost of leverage which is bad when the stock goes sideways for a long time. So you have to have a pretty sick confidence that your catalyst will play out.

 

@jmp8822 You wrote that you had more than one stock going into 2008 and you averaged down into one stock, but have you realized that that was only possible because you were diversified before? Imagine your only 5$ position would have gone down from 5$ to 0.5$, you networth would have tanked by 90%. I can`t imagine how depressed i would have been at that point, losing savings of more than 15 years of hard work.

 

From what i learned from other investors is that a maximum limit of 10-15% for normal businesses and 25-40% for diversified businesses or funds is a good compromise between diversification and outperformance and that is what i am using for the future. But i don`t regret being very diversified when i started because that has given me a lot of opportunities to learn and at the same time reduced the magnitude of my mistakes.

 

My biggest argument against concentrated investing is why not go all the way.  If you have three ideas why dilute your best with your second or third best?  So here we have it, someone is finally doing that, and amazingly this concept seems to be gaining traction.  Buy one stock and buy a put.  Sounds perfectly foolproof, nothing can go wrong, losses are protected and gains are ensured. As long as we can all pick the stock that will go up the most each year this strategy is foolproof.

[investor-man]

I think the biggest argument against concentrated investing is playing out on the board right now in ASPS/OCN. There are some very well respected folks on this board who understand the businesses very well and are/were highly concentrated in them. Due to some bad luck those stocks have completely tanked, and it looks to be somewhat permanent (correct me if I'm wrong - I haven't followed that closely). I suppose if you hedged it, you're portfolio would be "safe" at a 50% loss. I can tolerate volatility, but I doubt I could stomach too many 50% losses on the year. I don't know how I'd justify that to my wife in a year where the S&P went up by more than 10%, and I think she'd be justifiably upset about it.

[yadayada]

I think that was not a good candidate for really concentrated positions in the first place. I would not be comfortable enoguh with regulatory risk, no matter how good the company is. Condition for a very concentrated position

 

-rock solid demand for product, or trading under NCAV (so probably no O&G, tech)

-no regulatory risk

-a solid moat

-management that is aligned and not incompetent.

 

I dont think ASPS/OCN ticks all the boxes. If you put 50% of your money in something, it really needs to tick all those boxes.

[frommi]

I think that was not a good candidate for really concentrated positions in the first place. I would not be comfortable enoguh with regulatory risk, no matter how good the company is. Condition for a very concentrated position

 

-rock solid demand for product, or trading under NCAV (so probably no O&G, tech)

-no regulatory risk

-a solid moat

-management that is aligned and not incompetent.

 

I dont think ASPS/OCN ticks all the boxes. If you put 50% of your money in something, it really needs to tick all those boxes.

 

And it has to have long term options! That requirement alone would kill 90% of my ideas.

[DanielGMask]

I use a not so rigorous but much simpler aproach. I always measure my performance two ways, the first one only using the money I had at the beginning of the year to measure my performance of that year (which is the one I consider of meaning since my additions are small), and the second one using the whole value, incluiding every additional deposit. 

 

For doing that I simply register my return up to the moment I added money and start measuring the return on the value of the total portfolio (at starting of the year value + added money) from that moment forward annualizing the results. I aIso check the value of the S&P, BRK and a few other benchmarks I use (closing or openning, depending when the funds are available to trade) and register it in my excel. At the end of the year I apply the return of the S&P and the other benchmarks from that day to the end of the year and apply that return to that deposit and compare it to what I achieve with that money. If I decided to keep it in cash 'cause I didn't find anything attractive and my benchmarks were up during that period then I underperform on that percentage of the portfolio, and that way I can compare my returns to my benchmarks incluiding the opportunity cost of not being invested with my whole portfolio.

 

It doesn't matter if you buy or sell during the year, just check what was your portfolio's value at beginning of year and compare that with your end of year value and that's that. The thing that does matter is if you add or subtract money one or more times during the year, but that's also easy to calculate.

 

Actually I meant adding money into account. Say I have an monthly salary of 10K, and I need 7K for my monthly expenses, effectively I'm supposed to be adding 3K cash for investment every month. I might not have bought any stocks in the first 6 months since I could not find any opportunity. How do you include this 3K/month in the equation?

 

Your brokerage account might do the calculation based on the cash available on the brokerage account. But I might not have moved my cash from my saving account to my brokerage account until the opportunity arrived. When you calculate the yearly return, are the folks here adding the investable cash (3K/month in the example here) in the saving account as well?

 

 

 

I think the most rigorous solution to your problem is to consider each deposit as a separate virtual account.  All of your virtual accounts must have the same IRR (let us denote as R) over its lifetime, which is from when you deposited it to NOW.  And the R is the rate such that all your virtual accounts add up to your actual account balance NOW.

 

In your example you deposit 3k per month so say after 3 months you have 10k, then your R is expressed as

 

3*(1+R)^3 + 3*(1+R)^2 + 3*(1+R)^1 = 10

 

and the solution is R=6% per month or about 100% per year.  My solution R is a rough estimate using spreadsheet although there is a closed form solution for this geometric sequence.

 

I just plugged in the following into a cell in libreoffice (which should be compatible with excel)

 

=FV(1+R,3,-3,0,0)

 

and I tried various values for R until the result is closest to 10.  The second last term of the FV() formula is the initital condition, so you can also plug that in. 

 

This is the method I use to calculate my return over various periods of my investment career.  Let me know if you have comments or if I am confusing you....

[LanceSanity]

My biggest argument against concentrated investing is why not go all the way.  If you have three ideas why dilute your best with your second or third best?  So here we have it, someone is finally doing that, and amazingly this concept seems to be gaining traction.  Buy one stock and buy a put.  Sounds perfectly foolproof, nothing can go wrong, losses are protected and gains are ensured. As long as we can all pick the stock that will go up the most each year this strategy is foolproof.

 

Besides all the things that could go wrong with the one idea, you never know what the market is going to do. What if the market doesn't reward your favorite idea? With a put, I guess you won't lose much, but there are opportunity costs. In a one stock portfolio, you lose a lot of flexibility with portfolio management.

[investor-man]

I think that was not a good candidate for really concentrated positions in the first place. I would not be comfortable enoguh with regulatory risk, no matter how good the company is. Condition for a very concentrated position

 

-rock solid demand for product, or trading under NCAV (so probably no O&G, tech)

-no regulatory risk

-a solid moat

-management that is aligned and not incompetent.

 

I dont think ASPS/OCN ticks all the boxes. If you put 50% of your money in something, it really needs to tick all those boxes.

 

IIRC the most often cited positions for this type of concentration were BAC, AIG, GM, which tick none of those boxes (well maybe the first). In hindsight they all looks like no-brainers, but that's hindsight. I read all of the blogs and research on ASPS/OCN before it tanked, and it was very compelling. I can understand why people invested in it, and it's very unfortunate what's happened.

 

Someone said earlier that it's all about style and preference. HEAVY concentration isn't for me, and I think it'd be a tough one for anyone with a family or investors.

 

Also, don't listen to me. At the moment, I suck at this  ::)