Pabrai

[bg]

I would stress diversification in this environment over concentration.  My reasoning is the nature of a credit bubble.  Credit bubbles lead to malinvestment of resources by corporations and people.  Housing is of course currently on everyone's mind.  But malinvestment due to temporary perishing demand was also common in corporate America.  A business expands to meet current demand.  With the credit bubble deflating it is difficult to tell if a corporation will see a return to previous demand levels - or that demand was merely temporary, a symptom of loose credit.  Many of the companies I have looked at I have attempted to forecast future demand and thrown up my hands.  I have no idea if they were expanded to meet a constant demand or temporary demand.  Hence why I am stressing diversification in this environment.  There are plenty of good ideas -- spread the risk.

 

My reasoning.

[oldye]

 

 

 

" I have no idea if they were expanded to meet a constant demand or temporary demand."

 

 

Who ever said it was a good idea to invest in companies you don't understand? 

 

The problems arise when you think something is within your circle of competence and it really isn't.  When you know you don't understand then its easy.

 

Unless you think like Peter Lynch you won't outperform investing in thousands of stocks, for us humans the only way to really do it is to focus on things we can understand and to swing only at the fat pitches. 

 

 

 

[bg]

Well actually I understand these businesses perfectly well. 

[bg]

My friend I know people who have been in business for over 30 years who have seen significant declines in their business, especially since December.  They have never been impacted by a mere recession.   

 

I notice that Joel Greenblatt has changed his approach to a more diversified portfolio.  I am fairly certain he thought Office Depot was well within his 'circle'. 

 

http://www.google.com/finance?q=odp

 

 

 

[bg]

Shiddler, who is not an idiot, bought 14 million dollars worth and then:

http://www.google.com/finance?q=NYSE:FR

 

He founded the company..

 

Leon Cooperman been touting all year and loading up, very close to the people who run it:

http://www.google.com/finance?q=apl

 

Eddie Lampert and ESL -- they are not dumb:

http://www.google.com/finance?q=cit

 

Ian Cummings bought at 14, he's been in the Subslime business before:

http://www.google.com/finance?q=acf

 

Joseph Roberts, a great distress investor, he runs the company and bought

tens of millions of dollars worth:

http://www.google.com/finance?q=jrt

 

Carl Icahn I am positive understands development:

http://www.google.com/finance?q=OTC:WCIMQ

 

Richard Rainwater did his dd and lost 70 million:

http://www.google.com/finance?q=tma

 

I am NOT mocking them, just pointing out the hazard of a collapsing market.  This was not caused by bad fundamental analysis, accept possibly in the case of TMA.

[Mungerville]

Investors who did not protect their investments or businesses from the asset bubble across all classes are getting burned.  We had a wealth effect with increasing asset values inflating the economy and now we have a reverse wealth effect on the economy and declining asset prices with both feeding on each other on the way down just like they did on the way up. 

 

An investor should take this into consideration before buying a security.  He should wonder how long this dynamic may continue, will it mute equity returns for the next 2-3 years relative to a normal economic cycle where equities shoot up prior to the recession ending?, he should consider this and choose carefully, given his assessment of the yield, between an equity security of a company he knows well and the debt securities of the same company.  If he does not consider the dynamic carefully, he may be too fast to choose the equity position in this environment.  Clearly, Buffet is acting on this dynamic currently.