Is Concentration a better strategy than Buy and Hold?

[Viking]

I was crafting a response to @RedLion in the 'what are you selling' thread. I thought my response (which just kept getting longer) probably warranted its own thread as it might resonate with others who want to discuss it.

 

Concentration, not buy and hold, has been my secret sauce for the past 25 years. This strategy has delivered for me an average total portfolio return of 19% per year over 25 years (each of my first 3 years had negative returns). So, from my perspective, 'concentration' is a better strategy than a simple 'buy and hold' strategy.

 

My comment to @RedLion is it is easy to do well when you are concentrated in a stock that outperforms the market over multiple years. Lots of volatility along the way also helps (allowing for a position to be 'flexed' up and down). And that has been Fairfax for the past 30 months.

 

Important: my goal is NOT to concentrate my portfolio. I take what Mr. Market gives me (I try and be flexible and opportunistic). My preference is to be diversified. But when Mr. Market gets stupid with one or more positions (which happens lots) then I am happy to concentrate. To fund this increase in position size i use cash or I sell the stuff in my portfolio that i have less conviction in. Key: it is the concentration that drives the outsized returns over the years.

 

Of course there are many factors that drive an investors performance over decades. While I think concentration has been the most important factor impacting my performance (in terms of return) there are others. I pay attention to macro. I also am ok carrying large cash balances. I follow a pretty narrow range of companies and industries (although this has expanded over time). 

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In terms of 'flexing' a position:

- Canada has a number of tax free accounts for investors (RRSP, LIRA, TFSA, RESP). (Before my wife and i sold our house in 2021 all of our investments were in tax free accounts.) I do most of my ‘flexing’ of positions in my RRSP and LIRA accounts (Revenue Canada doesn't care what you do - in terms of trading in and out of positions - in those accounts).

- low fee (self-directed) accounts also makes executing this strategy easier. (Of interest, i used a full service broker up until around 2012. In 2012, i got a new financial advisor at RBC Dominion Securities and she told me my portfolio was too concentrated and i HAD to diversify it. My previous adviser was a buddy from high school - he got pushed into a new role at RBC. After the third phone call with the new advisor i decided it was time to flip all of my families investments to self directed accounts where RBC would leave me alone.)

 

Not having to think about taxes is a big benefit. Paying a minimal amount to execute trades is another big benefit. I understand these two things help greatly when concentrating/flexing a position.

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Real life example #1: when I left Kraft Foods in 2004, I was given two options with my pension: 1.) leave it with Kraft; they manage it and i get some unknown amount when I retire, or 2.) take a lump sum amount with with me and deposit it into a LIRA and manage it myself. I went with option 2. So my lump sum payout was $30,208 back in 2004. Today that LIRA is over $1.1 million = 19% annual return. (When I left Kraft taking my pension with me was an after-thought. It has since become a financial home run. It really is crazy how things turn out sometimes. I call that phenomenon ‘positive unintended consequences’ when taking calculated risks in life… Well thought out actions usually turn out exceptionally well because the downside risks are usually well understood. But my experience is there are always a few meaningful ‘unintended positive consequences’ - unknowable at the time you make the decision - that make a good decision even better than initially thought.)

 

Real life example #2: after our third child was born (2003) my wife and I set up a group RESP. We deposited $2,000 for each child ($6,000 total). The government kicked in 20% so we started with $7,200 in 2003. My kids are all in university right now. Total 'value' of the account is $202,500. (So far we have pulled out $117,500 to fund their educations and the current account balance is $85,000). Annual return has been a little under 17%. Our $2,000 initial investment back in 2003 will pay about 70% of each of our kids post-secondary education. (I use this as a real life example with my kids to teach them the power of compound interest. Hopefully it will motivate them to take personal finance seriously when they start earning big girl/boy money after they graduate.)

 

Bottom line, concentrating/flexing has delivered solid returns over a 25 year period. It works. (I don't think it was luck.)

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I have had this 'flex' strategy with Fairfax going back to 2003. Yes, it all started 20 years ago. My portfolio was up 87% in 2003 and it was mostly due to Fairfax. In hindsight, Fairfax had issues in 2003 that I did not fully appreciate. Some dumb luck involved there, for sure. But I'll take it. (Lots of people on this board at the time held my hand and helped me through the dark days of the short attack on Fairfax. Sanjeev. Bsilly and others.)

 

Fairfax fell out of favour again in 2006 (can't remember why). At the same time it was sitting on a massive credit default swap position (aka 'The Big Short'). As the housing/financial system in the US blew up, Fairfax made billions over the next couple of years. Mostly due to Fairfax, my portfolio had 4 straight years of stellar returns: 2006 (+29%), 2007 (+47%), 2008 (+17%) and 2009 (+31%). Bear market, strong upward trend that lasted years and lots of volatility - does this sound familiar? When I concentrate in a position I try not and leave it super concentrated for long periods of time. Sometimes there is a catalyst involved that should spike earnings and that always spikes a stock price (eventually). 

 

More lately, Fairfax got wicked cheap again in late 2020. I remember Sanjeev pounding the table on this board in 2H 2020 about how ridiculously cheap Fairfax was at the time. I got aggressive buying Fairfax in Oct and when the vaccine news came out in Nov, 2020 i backed up the truck on Fairfax. 2021 and 2022 have been my two best years ever in terms of total return. And 2023 has started out great. For the past 30 months we have had a strong upward trend and lots of volatility. Today Fairfax is a 29% position for me.

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There are times when the stars align for Fairfax (in terms of what is going on under the hood) and it is poised to make a bunch of money. Often, at the exact same time, the stock is deeply out of favour (2006)/hated (2020). The really interesting thing is 'the story' is out there for all to see and the stock still sells off. Conviction is important. And to have this you have to have a good understanding of the opportunity. 

 

Back in Sept/Oct 2022 we all knew Fairfax was sitting on a $1 billion after tax gain from selling its pet insurance (that no one know they even owned, it was such a small business). When this deal was announced the stock... sold off! At the same time, spiking interest rates was driving future interest income through the roof. And we were in an insurance hard market, which was driving 20% top line growth and record underwriting profit. What did the stock do? It sold off to US$450 in October. NUTS.

 

What is a rational investor to do? Back up the truck. When the stock pops higher I lighten up (I sell back down to my core position size over time). I am happy to book profits (that whole 'pigs get slaughtered' thing).

 

I have never owned Fairfax as a buy and hold stock (or any stock in my portfolio). I own it when it is cheap. I back up the truck if/when it gets crazy cheap. When the stock gets fully valued I likely will be completely out of it (and will stop following it so closely).

 

Over the years, I have used this strategy with other stocks. Fairfax is just the best example because of its frequency. Back from 2013-2015, I was banging the table on Apple (you can go back and read my posts on the Apple thread... similar to Fairfax today). My returns: 2013 (+32%), 2014 (+29%), 2015 (+19%). Mostly driven by Apple. I wasn't even following Fairfax during these years. (Before i invested in Apple i owned Blackberry for a brief time. By the third conference call i realized Blackberry management was a mess so i sold my position at a high single digit loss. Bad decision… right? Wrong. Buying Blackberry was a great decision because it taught me about the cell phone industry. When Apple got cheap a short time later i was ready. Without investing in Blackberry i never would have bought Apple. And that is one of the really cool things about investing… it is constantly giving you opportunities to turn adversity/failure into triumph.) Of interest, when i was exiting my oversized position in Apple in 2015/2016 some dummy named Warren Buffett was JUST STARTING to buy shares. Another really cool thing about investing: you can do lots of really stupid things and you can still do really well. 

 

Another example of concentration was when I went 100% cash in Feb 2020. A global freight train - the virus - was coming. Here in North America we watched it hit Asia first and then a week later it hit Europe. We knew what was coming and we knew it was going to be devastating. About a week later we saw the virus wipe out the two care homes in Washington State and completely paralyze the health care system/society. NOT going to 100% cash at the time seemed irrational to me. 

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There was only one time where I got messed up with this strategy and was in 2018. I was concentrated in BAC and the market decided they needed to throw a tantrum to get Powell to pivot from his tightening strategy. Stocks dropped 20% in December  2018 and financials got killed (down even more in a couple of weeks). Fortunately, I got lucky. Powell caved and stocks rocked in January 2019, led by financials. My analysis on BAC was solid. Sometimes that doesn't matter. 

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'Buy and hold' is a great strategy. I love reading @dealraker 's posts. Part of me wishes I could invest like he does. Holding ETF's is another solid strategy. However, I also think Druckenmiller is on to something with the whole concentration thing. The key is knowing when to concentrate. And how much to concentrate. And when to take profits (and sometimes losses when the market moves against you/you are wrong).

 

I laid this out above in detail because I wanted investors on this board to understand that there is no 'right way' to invest for everyone. There are many different right ways. And you see this in spades from all the exceptionally smart people who post on this board. The key is to find a strategy that fits for you (intellectually, emotionally, age, level of interest, commitment level, life situation etc). This will happen by keeping an open mind, constantly learning, trying different things and being rational. My strategy works for me. And I understand it will not work for most investors. I definitely do not recommend it to my friends/family... I tell them to buy ETF's. I hope that by sharing this it will stimulate lots of good discussion. And thinking. That ultimately delivers better returns to everyone on this board. 

 

Best of luck!

Edited March 22, 2023 by Viking

[Viking]

Here is what Druckenmiller had to say about concentration as a strategy:

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Stanley Druckenmiller: When I’ve looked at all the investors (that) have very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common. 

 

And it’s the exact opposite of what they teach in a business school. It is to make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying. 

 

I don’t know whether you remember that Icahn a few years ago put $5B into Apple. I don’t think he was worth more than $10B when he did that. 

 

[In 1992] when I went in to tell Soros that I was going to short a 100% of the fund in the British pound against the Deutschmark, he looked at me with great disdain. 

He thought the story was good enough that I should be doing 200%, because it was sort of a once-in-a-generation opportunity. 

 

So, [these investors] concentrate their holdings. This is very counterintuitive. 

 

In my thinking, [concentrating your bets] decreases your overall risk because where you tend to be in trouble is if you have 35 or 40 names. 

 

If you start paying attention to one. If you have a big massive position, it has your attention. 

 

My favorite quote of all time is maybe Mark Twain: “Put all your eggs in one basket and watch the basket carefully.” 

 

I tend to think that’s what great investors do.

 

- https://thehustle.co/stanley-druckenmiller-q-and-a-trung-phanin/

Edited March 22, 2023 by Viking

[formthirteen]

Thanks for sharing the story. I hope you remember that you are living every investor's dream. Enjoy

[Cod Liver Oil]

@Viking beautiful post. Thank you.

[Paarslaars]

Great story!

 

While I do believe there is truth to what you are saying, I'm wondering about generalizing concentration as a viable strategy.

Is the average investor who concentrates better off than the average investor who buys & holds? I honestly doubt it...

Clearly it worked for @Viking but I have a 'slight' feeling his investing skills are above average.

 

I do appreciate the post as it is somewhat of a wake-up call for me. I hold a relatively large (30-40%) BRK.B position.

While I do add frequently in dips, I rarely sell... even though there have been times (march 2022 with BRK.B @ 1.5x book) where I thought I should.

I'll remember this for next time.  

 

[Viking]

3 minutes ago, Paarslaars said:

Great story!

 

While I do believe there is truth to what you are saying, I'm wondering about generalizing concentration as a viable strategy.

Is the average investor who concentrates better off than the average investor who buys & holds? I honestly doubt it...

Clearly it worked for @Viking but I have a 'slight' feeling his investing skills are above average.

 

I do appreciate the post as it is somewhat of a wake-up call for me. I hold a relatively large (30-40%) BRK.B position.

While I do add frequently in dips, I rarely sell... even though there have been times (march 2022 with BRK.B @ 1.5x book) where I thought I should.

I'll remember this for next time.  

@Paarslaars i agree that concentration is a terrible strategy for the ‘average’ investor. My view is the ‘average’ investor should buy the Index via ETF’s and be done with it. Most average investors won’t get the return an Index gets. My point is if you want outsized returns (much better than the Index), concentration is one viable path. IF YOU ARE ABLE to figure it out/find the right fit.
 

i think 8% is a reasonable long term return for most equity investors moving forward. If your goal is 10% why bother with active management? It is so close to 8% just go with Index/ETF’s. Save time. Cost. And stress. 
 

But if you want to really outperform the index… something like 15% or higher every year? Buy and hold? Maybe. But i think it is unlikely. Concentration? Possible. But you have to be good. And that is the rub. 
 

Perhaps the lesson for ‘average’ investors is to be open to the idea. When the stars align (when something you understand exceptionally well gets wicked cheap). ‘Buy and hold’ is a solid idea. So is diversification (especially if you don’t know what you are doing). Concentration? For some investors it can play an important role (those that fully understand the risks).

[Paarslaars]

Good point, even the average investor will come across opportunities in their lifetime when a concentrated win is just screaming at them (march 2020)... then they should be open to it.

[ICUMD]

Definitely @Viking has some exceptional analytical skills.  

 

My original large concentrated position was in Fairfax India, currently still down about 25% in over 5yrs.  Wow.  Whoever coined the phrase, Don't time the market??? Ha.

 

Fortunately, I've managed to dilute the position to less than 10% of my portfolio size, mainly through several good quality CDN companies, esp BMO, which I levered into in the 2020 downturn.  

 

I now hold about 12-15 companies in my core.  

Focus is increasing dividend cash flow. I now add to deep corrections in the core.  I continue to repay tax deductible margin debt and maintain a positive carry. 

 

Diversification has helped balance my portfolio.

Investible available cash and cash flow to me are important components. 

 

 

 

Edited March 22, 2023 by ICUMD

[dealraker]

So it gets sort of fragile of sorts, it isn't something that is as simple as saying, "All these famous/well known guys say to concentrate so I'm concentrated and therefore superior and successful...I outperform."  I have no doubt, and I am not being facetious, that here at COBF there's a group that does move in and out of stocks and they do "outperform the market" over time.  I have written this about Parsad a few times becasue I do do try to follow the things he is writing about.

 

I'm not investigating Parsad or Greg, I am learning about businesses (something I just absolutely love doing for some silly reason) and finding things to buy myself.  I was on this board, then withdrew later to rejoin, years ago...bascially have read here since its origin.  I'm reading spec's stuff and several others now too.  I'm a slow learner but I do learn!

 

But, and here goes the part where I can seem harsh...but I'm not harsh if you could hear me speak instead of what I write.  You can be damn sure that those who do concentrate as a whole, as a percent, do not do well investing.   "They" do not outperform the market like some of the hedge fund runners that are endlessly quoted here.  As a matter of fact...didn't Warren Buffett make a bet with some hedge fund runners?  I believe he won...and not by a small amount.

 

So growing up and having to deal with losing my parents I got to know the men in my community who had the "stuff" and that stuff was money and net worth.  They all, and I mean literally ALL of them, bought and held stocks and/or ran their businesses.  They did not buy-sell-buy-sell-buy-sell and such.  Nor did they just own 5 stocks, they owned a lot of stocks.  

 

But there is so much more to this story.  My family still owns a couple of businesses and we meet regularly, it is a multi-generational thing.  We chose, and this began 40 years ago, to sell most of the family businesses and invest that money in the markets.  It is a solid-strong culture and it is by-damn INGRAINED within us.  Every meeting the same model, the same mandate through words pops up.  It is simply: "The average American is not aware that wealth is built from holding the stocks of productive businesses."

 

But there's more still!  We are assuming, just assuming, that none of us are the superior hedge fund runners that (again) get constant media attention and cut/paste here on COBF.  As my family members all say, "If you look in the mirror and don't see Warren Buffett...then you aren't Warren Buffett."  We are building a culture for the next generations and luckily they are right in tune with it.  Buy stocks; hold them; and by damn do NOT buy a stock you play to sell next week.  Why?  Because again, the proof is clear....the majority of those who do this suck as investors.  And that percentage is way up in the probabilities.

 

So if I die today those who receive the trusts aren't going to instantly pretend to be Grifin, Tepper, Paulson, Ichan, Soros, Ackman...or whoever. 

 

And to end this chant...or you may say rant...LOL.  I live in a community where millions were inherited from the sale of furniture businesses, tile businesses, newspapers, textile businesses...and whatnot.  Some went to real estate "deals" or start-ups....some went to tax-free income to re-risk their portfolios (I literally vomit when I write this) ... and....

 

They have literally lost their family money, the stuff others spent their lives building - now forgotten.  Big houses?  Yes they have those.

 

You can do well owning business and staying that way.  But it isn't something that is widely practiced or publicized.  Hell, we are all Peter Lynch's aren't we?  

 

Ranting, not proof reading....pardon what is surely spelling and grammar errors.  

Edited March 22, 2023 by dealraker

[Cigarbutt]

5 hours ago, Viking said:

 

 

Fairfax fell out of favour again in 2006 (can't remember why)...

Thanks for this post. If one aims to do better than the average, one has to be different (and better).

The challenge is to find some kind of an edge, whether concentrated or not.

It is often said that humans tend to forget the actual content of conversations around a situation but tend to strongly recall how they felt during those conversations. In 2006, holding Fairfax was quite uncomfortable (i was often having discussions with fellow expatriates who marveled at real estate and somehow felt at odds investing wise (they're still 'working')).

Anyways, that was then, now is now and the future is something else.

A fascinating aspect is that self-directed investing requires a balance between opposing arrogance and humility and public sharing on the topic tends to favor (or favour?) the former. i do appreciate the balance that you achieve.

Good luck to you and your family.

edit: link added from memory lane:

Fairfax Attacks Shorts, Then Restates - CFO

Edited March 22, 2023 by Cigarbutt

[LC]

I kind of agree with both Viking and dealraker.

 

there’s another active thread “who do you follow”. I had a post drafted which I didn’t submit but it went something like, “I follow people who own/have owned businesses themselves.”

 

I just bought into 3 small/mid size businesses in Colorado. I am not thinking at all about what I can sell my shares for. Why? Because at a minimum I am going to earn 50% of my purchase price annually just doing nothing. Instead I am thinking how to earn 75-100% by generate more revenue and optimize operations. 
 

These businesses aren’t a huge portion of my net worth but they are a big portion of my mental energy. So i am watching that basket very closely. 

[Gregmal]

I like all of it and its always an ever evolving process. It has to evolve generally, because the markets evolve. Stuff that works for awhile can stop working or be competed away. I haven't quite got an answer, but have always tried to do both. So I am generally 130-150% invested. That includes hedges and market neutral stuff, but the crux is to compound constantly. Not businesses but the portfolio NAV. Typically 2/3 of this is in buy and hold stuff and the rest is short term event driven trading stuff. Ive owned MSG shares since I pretty much started out in 2011 or whatever. Hamilton Thorne too has stealthy become a decently long term hold for me. But at the same time, I have done very well with the short term trading stuff. Its one of those things where when I was younger and hungrier Id be cool being plugged in 100% of the time, 24/7 and 365, which is what is typically required to trade in a way that justified it(IE 30%+ annually). But over the years that also got exhausting for me. Towards the end of 2021 I kind of made a conscious decision to use the transition that was occurring in the market to shift to probably 90% buy/hold/passive but the caveat was that I had to find things with the characteristics often displayed in @dealrakers holdings. Buy things that are special, durable, and desired. They should make money, and they should make peoples lives better. Ironically the implementation of this strategy went very well, but all my returns in 2022 where largely from....short term event driven stuff like buyouts and merger arbs. So far in 2023 I haven't done a whole lot of anything, until last week and the week before. Then put ~15% to work between UBS, XLE, TFC and WFC....seems like a market timing move...or maybe just reacting to price versus value? Hmmm..hard to classify and I want to put labels on these things to analyze my process, but at the end of the day, they dont necessarily need to be labelled. I dont think XLE/WFC/TFC are long term holds for me. UBS, maybe? Maybe not LOL. All I do know is the past 12 months or so of being predominantly buy and hold focused and worrying about business fundamentals rather than fluctuations has resulted in significantly higher quality of life for me, which was my goal. At some point the money has less meaning. I am able to do what I want with my life, I'm able to take my kids on vacation for 6 weeks in the winter, I'm able to impulse buy houses, Im able to give my kids whatever they want and more importantly, everything they need. Why not enjoy that? One day they'll be older and even out of the house, and then I can stare at a fluctuating digit on the computer like a gambler and redefine my life again if thats whats necessary. 

[james22]

5 hours ago, Viking said:

Stanley Druckenmiller: When I’ve looked at all the investors (that) have very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common. 

 

And it’s the exact opposite of what they teach in a business school. It is to make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying. 

 

Fallacy of the Formula?

 

There are many, many more investors without any reputation who blew up because they made large, concentrated bets.

[Cod Liver Oil]

@LC what types of businesses did you buy?

Running your own shop definitely makes you a better investor because you think like a business owner but small businesses tend to be simple monoline affairs while public securities are subject to more complex interacting forces which are impossible to fully score. It is a miracle that we have the breadth of opportunity to invest easily in thousands of publicly traded situations.

Edited March 22, 2023 by Cod Liver Oil

[Spooky]

A lot of the greats run a concentrated portfolio (Buffett, Joel Greenblatt, Nick Sleep). It works amazing if you're right! I read the Warren Buffett Portfolio by Hagstrom on Munger's recommendation and it talks about the concentrated portfolio, would recommend.

[LC]

Bought a skiing & fishing outfitter, pizzeria & bar, and HVAC commercial route. 

 

I definitely do not run the shop - I had 3 individuals ready to take over (exec sous chef, HVAC contractor, and a fishing/ski guide). All with 10+ years of corporate experience in a larger market (greater denver/front range) who we are able to install running the majority of the operations in a smaller area (mainly summit county). 

 

We bought the outdoor shop and pizzeria at 1-1.5x last year earnings. The HVAC we bought the existing book of business (stable for 5+ years) for 2x earnings. 

 

All 3 operators get to move to summit county under workforce housing (less housing expense for them), earn more $, and run their shop with partial ownership (and some oversight).

 

The ski shop is a bit key-man risk as the guide business will probably be a wash: old customers may fall off but our operator will bring his book of business from the front range area. The pizzeria/bar looks very good as the old owner/operator has no actual chef and also was running 3 different foodservice businesses so didn't really have the time to dedicate to it. New operator will be able to improve the menu (see: add salt), expand hours, and manage more events/catering. The HVAC business we bought a commercial book which should remain stable as the old owner will stay on for 6 months, new operator can manage a separate crew for residential runs, and I know a few multifamily developers in summit/grand county who will give us their HVAC business (and also run their catering through us, and provide cheap housing for the 3 new operators). 

 

As a kicker both the outfitter and pizzeria have a surprising amount of cash sales which the prior owners pocketed - so when I say I bought at 1-1.5x earnings, it's even cheaper as there are cash sales unaccounted for. When I bought I just considered it a wash: any cash sales were zero margin and just went to the operator as their "salary". In reality that's probably not the case and should provide additional earnings. Just provides some margin of safety.

[dealraker]

Keep in mind that owning a large group of stocks doesn't mean non-concentration.  I am 40% AJ Gallagher and 40% Berkshire and lengthy ownership of other stocks has made those dwarf the majority.  Yea, if you hold stock for years stuff will happen to you that you'd not recognize!

 

I have a bunch of "stocks" that I can't even identify from the spin-off's.  One day a few years ago I saw Otis Worldwide in my list on Wells Fargo.  I had not been following the parent company...had no clue there was to be a spin off (or two) and there it was...a small amount of Otis!  I instantly felt an elevated mood coming.

 

 

[SharperDingaan]

We learnt long ago that to get wealthy you need to concentrate - to stay wealthy you need diversification. Diversification by itself, is a good thing; but once you go over 10-12 assets - it becomes more about limiting loss than making money (ie: staying wealthy). We benchmark against a double every 6 years (12% CAGR in technical terms), but to do it we must both concentrate and use active management; within a limited term engagement. Not for most people.

 

Anyone who has owned/run a business, implicity understands that time is one of the diversifying assets, as is liquidity; boredom is the enemy. You cannot grow wealth if you cannot scrape together the wealth to buy good businesses in distress, as/when they become available. Storms eventually pass over, the sun shines again, and you get richer still. However, when you start doing stupid things simply because you're bored/tired - you need to walk away. There are people what 'do' and people what 'don't'; you need to know which of these people you are.

 

Most people would be better served if they 'never' invested. House paid off and a series of government bonds to pay the upkeep as the structure deteriorates over time. For kicks, invest in lottery tickets every week, spend time with the kids, and spend on toys/exotic vacations. No need to ever touch a stock or index fund.

 

COBF is a great forum, but keep in mind that there is a great deal of survival bias. For every few posters who routinely do well, there are seas of people who routinely do badly; we just don't see them 'cause they don't post on the COBF board. Also keep in mind that if you have to play against Gretzky every week, you're also going to become a much better player, and have higher average returns.

 

All good.

 

SD

 

 

 

 

 

 

Edited March 22, 2023 by SharperDingaan

[Xerxes]

Congrats Viking and thanks for yr contribution to this board. 
 

my take is that a “buy and hold” well executed, will have a few monster wins which would make it a de facto “concentrated” portfolio over time. Natural order of things.  
 

however, a well executed “concentrated” portfolio may or may not become “buy and hold”, since one can trim and adjust. 

[Munger_Disciple]

@Viking Thanks for sharing your experiences. Congratulations on your success and all the best to you & your family.

 

Concentration & position sizing is a very interesting topic. To get rich, I think one would have to concentrate but only after doing extremely thorough due diligence in a name/industry they develop deep understanding in. Even then, something could always go wrong. So it has to be a situation that is almost 100% certain to work out over the long run & trading at a deep discount. I suspect opportunities of this type are very rare so one has to act when it falls inside their strike zone. 

Everyone likes to quote Munger and Buffett about concentrating but no one is Buffett or Munger. We need to be careful with survivorship bias when it comes to concentrating (and hence copying others). We each need to understand our own advantages & limitations and act accordingly. 

 

Added thought: A less stressful & perhaps easier way to achieve concentration is by starting with a semi-concentrated portfolio (say 10 positions) and have one of the positions become huge relative to others due to a home run. 

Edited March 22, 2023 by Munger_Disciple

[Gregmal]

I have actually found it’s really easy to get concentration in a big way if you utilize leverage in a half intelligently structured way. Have had mid single digit positions turn into 20-30% positions, and low teens positions turn into positions greater than 50-70%. The problem blocking many from doing this is 1) understanding how to punchcard this strategy, 2) navigate options trading and 3) they’re petrified of losing let’s say 5-10% which to me is silly because if I’m not willing to risk 5% on a trade, I don’t know how I could ever reasonable expect to make a decent amount of money on it. But that’s really the key. If you are fine putting 5-7% on the line, and can isolate the strategy to punchcard ideas and structure it to the upside, it’s ridonkulously asymmetric. 

[Red Lion]

@Viking this is a fantastic post, and a fascinating and impressive story! 

 

Sorry for the short response, as I know this post was partially in response to my query in the What are you Selling thread, but I'm getting ready to get the toddler out the door to a medical appointment. 

 

I agree that the highest returns are likely to come from concentrated investment portfolios. I agree with @SharperDingaan that you need to be concentrated to get wealthy, and diversified to stay wealthy. I have personally experienced both sides of the concentration coin, and am in the middle of a couple year long diversification campaign for managing my own stupidity. 

 

Traditionally I've had a concentrated portfolio, beginning with buying gold coins as a teenager in the late 90s (my first multi bagger) and rolling that money along with savings (and even some 0% CC cash advances in the aftermath of the GFC) into stocks with some big swings, but favorable high double digit annual returns (around 15% from the late 90s to 2016 when it all went to shit...)

 

Then I went on to do something REALLY STUPID in 2015. I took a highly concentrated position in Kinder Morgan warrants which got wiped out and took a massive over 50% drawdown on my portfolio. During this same year I got divorced (not as a result of the investment drawdown at least) and suffered a personal hospitalization during a lapse of insurance coverage. This sent my net worth significantly negative, and I still had a huge tax bill that I didn't have the money to pay. So this period in my life certainly taught me some hard lessons about risk management among other things, and it continues to color my philosophy. 

 

On the flip side, I've done very well with concentration both before and after my huge drawdown in the public markets, but the most life changing example of this has been in my business endeavors. I do own a 50% stake in two different closely held corporations. The first had been fairly successful as far as these things go, and the second ended up providing a compelling opportunity. Ended up going all in on the second corporation including with borrowed money. This second venture is on track to return about 100X its investment (pretax) in operating cash flow, and has turned into a life changing opportunity. I should point out that this strongly influences my investment strategy because now only about 8% of my liquid net worth (and a lot less depending on how you value my closely held shares) is inside tax advantaged accounts, the other ~92% is in fully taxable accounts, and I am currently in a pretty high tax bracket in a high tax state. 

 

So that brings me to my current chapter. I think I could put up higher returns with a concentrated portfolio. I've done it from around 1998-2016, and again from 2018-2021. In between I had invested any available capital in my first closely held corporation and paying back back taxes. For me it's not worth the risk of making another stupid decision like I did in 2015/2016 to try to get 15%+ annual returns. Also, I now have a strong desire to find long term compounders that can increase in value tax deferred over time to be sold off as my tax bracket allows to prudently manage returns. 

 

One idea that I've been gravitating towards since the beginning of 2022 is to make a variety of changes that I believe will allow me to earn a decent after tax return. I would like to limit each position by invested capital to 5% of the portfolio. Try not to make more than 25% of my investments in one particular industry, and try to avoid taking on more than 50% of investments with strong correlations to higher or lower rates for example. Focus on companies earning high returns on invested capital at decent valuations. I don't exactly have a buy and hold plan, it's more of a hybrid. The plan is to let the winners ride tax deferred, and then to evaluate losers and underperformers to sell off in a tax neutral fashion if possible to raise capital for additional investments. I think you'll almost certainly outperform my strategy, particularly on a pretax basis, but I think you're a better investor than I am anyway, and I really just need to beat inflation by a few percent a year with as little tax friction as possible, and I'll be just fine and sleep well at night. 

[sfbm21]

16 minutes ago, Gregmal said:

I have actually found it’s really easy to get concentration in a big way if you utilize leverage in a half intelligently structured way. Have had mid single digit positions turn into 20-30% positions, and low teens positions turn into positions greater than 50-70%. The problem blocking many from doing this is 1) understanding how to punchcard this strategy, 2) navigate options trading and 3) they’re petrified of losing let’s say 5-10% which to me is silly because if I’m not willing to risk 5% on a trade, I don’t know how I could ever reasonable expect to make a decent amount of money on it. But that’s really the key. If you are fine putting 5-7% on the line, and can isolate the strategy to punchcard ideas and structure it to the upside, it’s ridonkulously asymmetric. 

can you elaborate little further?

 

[thepupil]

27 minutes ago, Gregmal said:

I have actually found it’s really easy to get concentration in a big way if you utilize leverage in a half intelligently structured way. Have had mid single digit positions turn into 20-30% positions, and low teens positions turn into positions greater than 50-70%. The problem blocking many from doing this is 1) understanding how to punchcard this strategy, 2) navigate options trading and 3) they’re petrified of losing let’s say 5-10% which to me is silly because if I’m not willing to risk 5% on a trade, I don’t know how I could ever reasonable expect to make a decent amount of money on it. But that’s really the key. If you are fine putting 5-7% on the line, and can isolate the strategy to punchcard ideas and structure it to the upside, it’s ridonkulously asymmetric. 

 

I don't really understand your point though because theoretically as one gets wealthier, the less and less one needs to risk as a % to make a "reasonable amount of money".

 

Like let's say you find an options situation that's a 0x or a 10x. If you have $100K and are saving a good bit and you're young, maybe it's not crazy to risk 10% of your capital on that. Can make it back easily and in the upside case you double your capital base. If that person ahs $1mm, I don't think you risk $100K on it. I'd probably risk the same $10K. No right answer of course. 

 

 

 

Edited March 22, 2023 by thepupil

[Gregmal]

3 minutes ago, thepupil said:

 

I don't really understand your point though because theoretically as one gets wealthier, the less and less one needs to risk as a % to make a "reasonable amount of money". 

 

 

 

Relative to the portfolio I mean. A 5% position does 50%, it’s 2.5%…who cares? Waste of a winner IMO.

 

Although separately, you are correct. That’s why getting some money and assets to your name is so important for younger people. Being able to parlay an irrelevant trade into a new car or seeing your fluctuations equate to someone else’s annual salary is powerful.