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What would have to happen for you to put 100% of your portfolio into 1 position?


jawn619
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I had a discussion with a trader who does index ETF arbitrage and he showed me a theoretical opportunity where an ETF was trading $0.15 from fair value and asked me if I would trade against it and how big my position would be. I said I would trade on it but don't know how big of a margin of safety it was. He said he would put his maximum buying power in it, take out a second mortgage on his home, call his parents and take out a second mortgage on their home and put all that money into the opportunity. It just made me think of how different people's think of risk differently.

 

What would have to happen for you to put 100% of your net worth into one position?

 

Berkshire Hathaway trades at 0.1x book? Google trades at 4x P/E? IBM becomes a net net? Discuss

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I would never have 100% net worth in one position. I would never mortgage the house, etc.  50% max if it was Berkshire under 0.5x book.

 

"Never risk what you have and need for something that you don't have and don't need."

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The ironic part about this question, is that I would rather have all my money in Berkshire at 0.7x book than at 0.1x book. If it's trading at 10% of book, then something is severely broken in the market. I would feel more uncomfortable investing at 0.1x book.

 

I don't believe that a liquid security can become severely mispriced on a quantitative basis in today's markets. There are too many screens that would identify them. If you did come across one, then you can be sure someone else has looked at it. And they decided to pass. That would scare me. There's basically no way to tell why the market is letting you have this opportunity.

 

I would consider a massive position only if the reasoning was more qualitative in nature.I did at one point have 80% of my assets in CSTR. Everyone knows that NFLX and online video will replace DVDs. But the market was pricing in a severe and repaid decline in Free Cash Flow. If you looked at some of the consumer data, it was pretty easy to see that it would take longer for DVDs to die out.

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Maybe send him a copy of 'When Genius Failed'?  I would have no problem with 100% of my investable net worth in Berkshire at 1x book value (not a typo, didn't mean .1x).  But I wouldn't do anything like that for an arb spread that can widen just as easily as it can narrow.  That's just stupid.  I think the Lion Fund did the closest I've seen to 100% in one position with CBRL.  Fairholme did as close as I've seen in a mutual fund with AIG.

 

People lever up and put multiples of their net worth into commercial real estate deals all the time.  I think that was what ultimately turned Charlie Munger off from that business.

 

I had a discussion with a trader who does index ETF arbitrage and he showed me a theoretical opportunity where an ETF was trading $0.15 from fair value and asked me if I would trade against it and how big my position would be. I said I would trade on it but don't know how big of a margin of safety it was. He said he would put his maximum buying power in it, take out a second mortgage on his home, call his parents and take out a second mortgage on their home and put all that money into the opportunity. It just made me think of how different people's think of risk differently.

 

What would have to happen for you to put 100% of your net worth into one position?

 

Berkshire Hathaway trades at 0.1x book? Google trades at 4x P/E? IBM becomes a net net? Discuss

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This discussion is a bit pointless because the ETF trader is probably talking about a whole different kind of situation than what the readers here are assuming. Suppose all market participants are retards and SPY trades $.15 under it's intrinsic value. You could easily buy it, sell the underlying portfolio at the same time, redeem your shares in the fund at market close and you would be out of your position in a day. Such a trade is practically speaking 99.99999% risk-free if you know exactly what you are doing unless the world is collapsing and I would go 100%+ long too if I knew the opportunity existed (and if I was 100% sure other people were actually stupid and that I am right).

 

Unfortunately this would never happen because other smart market participants are monitoring SPY as well and it never trades away more than $.01 from fair value. My guess is that the trader was just trying to convey how rare of an opportunity this seemingly small $0.15 profit was by explaining he would literally bet the house on it. That used to be my job. But that's a short-term ETF-arbitrage perspective - completely different from buying BRK on margin and hoping the discount to fair value will close over time.

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I have trouble committing 20% of my portfolio into 1 position. I doubt there would be situation where I'd commit 100%.

 

1 position is a bit extreme. I have a related question though. Some people argue "why would you put money into your 25th best idea instead of putting it into your 1st best idea". If you follow this line of thought, how come you have more than 1 position?  ;D

 

I never could do it, because I never know what is my 1st best idea.  ;) But I wonder what others think.

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I have trouble committing 20% of my portfolio into 1 position. I doubt there would be situation where I'd commit 100%.

 

1 position is a bit extreme. I have a related question though. Some people argue "why would you put money into your 25th best idea instead of putting it into your 1st best idea". If you follow this line of thought, how come you have more than 1 position?  ;D

 

I never could do it, because I never know what is my 1st best idea.  ;) But I wonder what others think.

 

I think that formulation is too literal. If you can't distinguish discretely, you might still be able to group ideas and rank them -- plus, there is some point where the delta between the diversification benefit and the opportunity cost becomes negative.

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I think that formulation is too literal. If you can't distinguish discretely, you might still be able to group ideas and rank them -- plus, there is some point where the delta between the diversification benefit and the opportunity cost becomes negative.

 

Perhaps I should split off a thread on this. Let's do this if people want to continue talking about this: "How to rank ideas".

 

I have trouble ranking ideas discretely - not sure what you meant by this - or not. I guess it's possible to rank them by expected return. But expected return is a range and usually overlapping range. Plus there is a risk factor and yeah the business-line-diversification factor.

 

How would a person rank, let's say BRK, FFH, AAPL, SFTBY, LMCA, JPM at current prices?

 

For curve balls that might be more difficult to rank (or less difficult for some?): FRMO, Fannie/Freddie lottery tickets, any oil stock.

 

Assuming you can rank, the next question is what position size do you assign to each rank.

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I feel like, implicitly, ranking is part of figuring out if you can go to a 100% position, but I'll defer to the Moderator Gods (if we actually have any...)

 

By discretely, I mean that, JPM > WFC > BAC -- not that I necessarily believe in that ranking, but it's just an example of what I'm trying to say. In other words, ranking discretely would be to say that you can rank any individual company/security versus other individual companies/securities.

 

By grouping, I would mean that, it's probably safe to say that JPM, WFC, BAC are better bets than, say, a group of random reverse merger Chinese companies. Now that's an extreme, but it can be applied to less extreme situations where you might be able to say that JPM, WFC, BAC are probably better bets than a group of steel companies (maybe excluding Posco).

 

I think the point you're trying to make on discrete rankings is that it's difficult to know a priori whether you're correct, and it's difficult to know how you weight expected return versus dispersion of outcome, and you'd be right! Ranking (and position sizing) is more art form than science -- but Greenblatt's advice to put more in the investments where you're more certain you'll not lose money is probably the right way to go.

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Grouping: I think I can do that if by grouping we mean "here's a bunch of stocks/companies that are attractive based on my criteria and here's a bunch that is not so attractive and here's a bunch that are no-nos". I have no issue with that although clearly there are some stocks/companies on the edge of groups. It helps that in grouping I can wave away companies/stocks via "I am not certain about this one, so I'll just not consider it at all".

 

Ranking: This is much harder for me than grouping. Yes, you are right, the issue is judging a priori the outcomes and therefore rank. Also at this level I cannot easily wave away anymore: the company is already grouped as attractive, I have to rank it to decide if it should be part of my portfolio and how big a part.

 

Thanks

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I had a discussion with a trader who does index ETF arbitrage and he showed me a theoretical opportunity where an ETF was trading $0.15 from fair value and asked me if I would trade against it and how big my position would be. I said I would trade on it but don't know how big of a margin of safety it was. He said he would put his maximum buying power in it, take out a second mortgage on his home, call his parents and take out a second mortgage on their home and put all that money into the opportunity. It just made me think of how different people's think of risk differently.

 

What would have to happen for you to put 100% of your net worth into one position?

 

Berkshire Hathaway trades at 0.1x book? Google trades at 4x P/E? IBM becomes a net net? Discuss

 

I think for me is if I own and run the company.

 

 

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You could put 100% of your net worth into a house.

 

But you can hedge out fire/flood/earthquake risk with insurance. 

 

So you can do that with a lot of concentrated equity positions too... using put options.  So to answer the question, there would need to be an options market for the security.

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BRK trading below book value is a good option since it is already well diversified. I think buying a S&P 500 index fund with the S&P below 800 is another good one.  Otherwise, I could see putting 100% in if I thought the risk of capital impairment was 0. Just depends on the situation, your understanding of it, and your conviction to stick with it. Even a well diversified portfolio is not assured of positive returns. 

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I would need 2 conditions to put 100% into a single position.

 

1. Very limited downside.

2. A reason why it's not possible to diversify. For example, in most situations it's not feasible to buy 70% of a house or 40% of a business. You have to buy the whole thing or nothing at all.

 

I wouldn't make this decision by focusing on the potential upside.

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I think buying a S&P 500 index fund with the S&P below 800 is another good one.

 

You cannot treat index fund as 1 position.

 

Of course, based on that logic, conglomerates like BRK come closest to being attractive as 1 position - they are almost funds.

 

 

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Jurgis: Point taken. In my mind, it would be a single position. I plan to put some money in SPY when the market is much lower, but still own individual companies as well. I guess I just think of SPY as being one position, but it is obviously 500 different positions.

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You could put 100% of your net worth into a house.

 

But you can hedge out fire/flood/earthquake risk with insurance. 

 

So you can do that with a lot of concentrated equity positions too... using put options.  So to answer the question, there would need to be an options market for the security.

 

I agree - all I need is an options market in the stock I want to buy. I've done it with BRK, done with FFH in the past, done with ORH, and now doing it with VRX.

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  • 1 month later...

I second Eric's opinion about hedging.  If you believe that a certain position has 2-3x upside and you can buy a put at 10-20% below current trading price at a fairly cheap price, I would put 100% of my networth in that trade/investment.  Granted, there are a few things to take into consideration.  Is your networth already a huge dollar figure?  Is your networth small and you can easily recover a 10-20% drop via time and income?  Is your investment a solid 2-3x upside with virtually no downside?  Or is there some sort of tail risk event that may render it impaired?  The beauty of buying the put is that if the price of your underlining stock falls dramatically, you can take the proceeds from the put protection to either re-allocate towards a better idea or to own more of your existing position.  Now you own a larger position in your favorite idea at a much lower cost.  See how the fundamentals is very important here? If your thesis is wrong, then you have to move on and lick your wounds that you suffer a 10-20% impairment. 

 

I don't advocate the above strategy for everyone.  This would be a terrible advice for a Walter Schloss type investor.  I happen to own a fairly concentrated book and I tend to have a "feel" for what the catalyst for some of my ideas are.  If you're naturally a diversified investor with 30+ positions, I probably would recommend that you never put 100% of your networth into a single idea. 

 

 

You could put 100% of your net worth into a house.

 

But you can hedge out fire/flood/earthquake risk with insurance. 

 

So you can do that with a lot of concentrated equity positions too... using put options.  So to answer the question, there would need to be an options market for the security.

 

I agree - all I need is an options market in the stock I want to buy. I've done it with BRK, done with FFH in the past, done with ORH, and now doing it with VRX.

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Guest longinvestor

Even in today's overvalued market, I'd go 100% BRK if it dropped to book value with Buffett's passing as I'd believe it an overreaction soon corrected.

There's been an slow over-reaction for a long while already, purportedly due to concern over the transition. This is much more of an opportunity to go 100% into BRK. For those who would like to, can rationally do so over time. I'm one such, surely there are more out there.

 

The headline like opportunity that you're talking about will be short-lived and the 100%ers are not likely in that pond.

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Guest longinvestor

Even in today's overvalued market, I'd go 100% BRK if it dropped to book value with Buffett's passing as I'd believe it an overreaction soon corrected.

There's been an slow over-reaction for a long while already, purportedly due to concern over the transition. This is much more of an opportunity to go 100% into BRK. For those who would like to, can rationally do so over time. I'm one such, surely there are more out there.

 

The headline like opportunity that you're talking about will be short-lived and the 100%ers are not likely in that pond.

 

Here is some math re;buy backs at BV. Setting aside $20B, at the current BV of $150,000 per A share, they will be able to buy back for 533 trading days at the average daily trading volume of 500 shares. During those 533 days, another $50B+ cash would've accumulated. Let's see who is going to wear who down.

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As a great admirer of BRK and Buffet, I find that idea to be quite troubling.  I probably would if they separated the re/insurance business from the OpCos.  I'm perfectly okay with owning the amazing sets of OpCo assets, but the speciality risk underwriting scares me and would keep me up at night.  I think that it takes someone of Buffet's ability to be able to provide oversight on the udnerwriting standards for the various insurance entities.  I would suggest reading the book "fatal risk" to better understand how Greenberg's forced departure from AIG might've lead to AIG's downfall. 

 

I also think that there will be more skeletons that gets flushed out when Buffet passes away.  We do not know what they are now.  Fiefdoms will likely occur as Buffet is clearly not keen on appointing a new CEO in the same cloth as him.  My two cents. 

 

Even in today's overvalued market, I'd go 100% BRK if it dropped to book value with Buffett's passing as I'd believe it an overreaction soon corrected.

There's been an slow over-reaction for a long while already, purportedly due to concern over the transition. This is much more of an opportunity to go 100% into BRK. For those who would like to, can rationally do so over time. I'm one such, surely there are more out there.

 

The headline like opportunity that you're talking about will be short-lived and the 100%ers are not likely in that pond.

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Even in today's overvalued market, I'd go 100% BRK if it dropped to book value with Buffett's passing as I'd believe it an overreaction soon corrected.

There's been an slow over-reaction for a long while already, purportedly due to concern over the transition. This is much more of an opportunity to go 100% into BRK. For those who would like to, can rationally do so over time. I'm one such, surely there are more out there.

 

The headline like opportunity that you're talking about will be short-lived and the 100%ers are not likely in that pond.

 

There not many arguments for 1 position portfolios, given the free lunch of diversification, I'd think there more headline-like than rational-over-time 100%ers. 

 

But just answering the posed question: nothing has yet happened that would put me 100% into 1 position, including the long-while BRK opportunity. Only something like the short-lived example would.

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