Is Concentration a better strategy than Buy and Hold?

[Gregmal]

24 minutes ago, sfbm21 said:

can you elaborate little further?

 

October 2021 had a 75 bps position in BRG via call options. 50 bps in PTON puts. 300 bps in VIX calls to hedge out and effectively guarantee a big year. BRG got sold(which was the thesis) and 11x’d. PTON crumbled on sales deceleration, ~7x on the puts. People got scared of the South African variant omicron over thin trading Thanksgiving weekend. 6-7x on VIX. 
 

Part of this is playing individual themes but generally, that’s less than 5% of the portfolio structured in a way to capture upside and when right turned into 20-30%. Just one example I could easily put down but you can do it in different ways and however it suited what you invest in and how you invest. A bunch of us I know were doing it with Berkshire in the low 200s coming out of COVID. 
 

The key is overcoming the inherent fear of “losing money”. Losing money and seeing volatility are two different things. You can’t play poker effectively if you’re always worried about wagering your chips. You have to let the situation and the numbers talk to you. With investing you don’t have to do anything and you can also tailor how you wager to enhance your odds.

Edited March 22, 2023 by Gregmal

[rohitc99]

44 minutes ago, RedLion said:

@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. 

great story and inputs from you and viking

 

can you share more on the business ventures, without giving out personal details. what kind of opportunities are these ? how did you source them ? what was involved in running them including your effort and what was your due diligence process

[Red Lion]

23 minutes ago, rohitc99 said:

great story and inputs from you and viking

 

can you share more on the business ventures, without giving out personal details. what kind of opportunities are these ? how did you source them ? what was involved in running them including your effort and what was your due diligence process

I sent you a dm. 

[james22]

Had the Fannie Mae/Freddie Mac SCOTUS decision gone our way, those who bet big would have looked like heroes.

 

Instead: goats.

 

 

[Spekulatius]

it is interesting to see that seemingly detrimentally different approaches of Buy and hold (coffee can) or concentrated swing trading can work well. I have heard about people who did well using momentum strategies as well. I think the important insight is to find what works for you - where is your edge in terms of knowledge and temperament.

I am more of a diversification /sleep well kind of kind of guy.

 

Quite frankly, you can do pretty well owning just index funds (at least in the US0) as long as you don't do stupid trades. Different people, different strokes.

Edited March 22, 2023 by Spekulatius

[Red Lion]

43 minutes ago, Spekulatius said:

it is interesting to see that seemingly detrimentally different approaches of Buy and hold (coffee can) or concentrated swing trading can work well. I have heard about people who did well using momentum strategies as well. I think the important insight is to find what works for you - where is your edge in terms of knowledge and temperament.

I am more of a diversification /sleep well kind of kind of guy.

 

Quite frankly, you can do pretty well owning just index funds (at least in the US0) as long as you don't do stupid trades. Different people, different strokes.

 

I think a lot about this. I should probably just do 90% SPY and 10% T-Bills, rebalance once a year, and find something more productive to do with my time. I enjoy following the stock markets, and I certainly think I can outperform the above strategy, but maybe I'm blind to my own shortcomings (I've found most people are, I try not to be, but still am). 

[Rod]

If you find that flexing a position over time works, wouldn't it be better to just go all in or all out? Why maintain any core at all? Trading around a position either works or it doesn't. Personally I don't do it.

 

I have a pretty similar long term record to you and I've always owned 6 or 7 stocks, currently only 4. So I agree totally with the concentration idea.

[dealraker]

3 hours ago, Spekulatius said:

it is interesting to see that seemingly detrimentally different approaches of Buy and hold (coffee can) or concentrated swing trading can work well. I have heard about people who did well using momentum strategies as well. I think the important insight is to find what works for you - where is your edge in terms of knowledge and temperament.

I am more of a diversification /sleep well kind of kind of guy.

 

Quite frankly, you can do pretty well owning just index funds (at least in the US0) as long as you don't do stupid trades. Different people, different strokes.

Agree completely with spek's post.  The thing that I tend to promote given I'm around (not here on COBF) those who simply don't have the time or interest to "manage" a portfolio - is that a simple buy and hold will do very well over many years.  The people who inherit my money won't spend time with managing their money like I do so I'm passing down a model as are the others in my family who are on the upper end of life.  

 

I spend a lot of time on Cumberland Island GA, I have a connection to one of the Carnegie descendents who still owns property there (95% of the island is a wilderness area now) and I use his/her house.  Basically all the Thomas Carnegie descendents (he was Andrew's younger brother and invested with him- and at one time the world's 5th richest man) say that their forebearers lost the family money from taking it out of the market to do "special deals" of this and that, mostly real estate.  

 

Hopefully at least the 2 generations after me are in training mode not to do that.  

 

Of course I would not be here enjoying this board if everyone invested like I do.  LOL, the differences are the attraction to being here.  

[mcliu]

Seems like it really depends..

 

If you want exceptional results, you almost have to concentrate.

But you have greater risk of blowing up if a) you don't know what you're doing, or b) if you've made a mistake in your analysis or c) just bad luck/black swan.

If you're young and talented this is probably the way to go.

 

If you're older and less talented at investing but wealthy, you probably want to diversify and lower the odds of a bad outcome.

[Viking]

On 3/22/2023 at 3:08 AM, ICUMD said:

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. 

@ICUMD Fairfax India’s stock - for me - has felt a little like a mermaid’s siren call drawing ships to wreck. That is a really unfair thing to say as i do think Fairfax India is managed very well. But the stock really is challenging:

- confusing (trades in US$ on Canadian exchange)

- illiquid (i can move the price when i try and flex a position higher or lower)

- ever shrinking float of shares available to public (both Fairfax India and Fairfax have been buying back stock)

- perpetually undervalued (at least the past 4.5 years)

- unpredictable catalyst (timing of company buying back stock)

- parent (Fairfax) who is profiting greatly from undervaluation (methodically, materially growing ownership percentage each year). 

 

I have held a large position a couple of times over the years. But i am lucky not to have been burned (just singed). Having said all that, i do think the stock is very cheap. I do own a little Fairfax India. And i do flex my position up and down a little. But i now keep it small. Good luck!

 

Edited March 23, 2023 by Viking

[maplevalue]

In my experience doing proprietary trading on the sell side, any given year the vast majority of my P&L was driven by a very small amount of trades (usually 3-5) which were either sized relatively large, or I was able to let run through my initial target. Finding the trades you could size up was key, and in order to do this you need a good understanding of the downside. All this is to say I would be more comfortable with a concentrated portfolio.

 

One technique I have seen is people look at their concentration based on the book value of their positions. I think this makes a lot of sense. 

[Castanza]

I think gluing yourself to any specific portfolio allocation is dumb unless you’re to the point where you are just preserving wealth. The only two positions I haven’t traded out of are RTX and MSFT. Largely because they are in taxable accounts and my cost basis is so low. 
 

Take what the market gives you. If the market is going to puke and give me a once in a 10-15 year opportunity why would I waste that opportunity with a 1-2% position? If that’s all you’re going to do then either index or go 50/50 SPY & BRKb, close your eyes and wake up when your 65 with an average retirement. 

[Viking]

On 3/22/2023 at 4:27 AM, dealraker said:

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."

 

…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...

@dealraker As per usual, your comment did not disappoint! As i get older, I am starting to think a little about the future… a future when i am no longer around (hopefully many years away). Or if i am hit by a bus tomorrow. What happens to what i have built? I really like your strategy:

1.) establish a culture with the next generation: buy stocks and hold them for the long term

2.) time tested strategy: “wealth is built from holding the stocks of productive businesses”

 

I understand that my strategy is not repeatable by anyone in my family. I will leave them (hopefully) a bucket of $. But nothing more (as it sits today). I leave them fish. But i have not taught them how to fish. Thanks… lots to think about. 
—————

i some ways, i may be setting my kids up for failure… because i am role modelling the wrong behaviour (regardless of how well it is working for me). 

Edited March 23, 2023 by Viking

[Viking]

1 hour ago, maplevalue said:

One technique I have seen is people look at their concentration based on the book value of their positions. I think this makes a lot of sense. 

@maplevalue My family has investments in 12 different accounts. It can get confusing to keep track of everything. Confusion rarely leads to higher returns. I manage all 12 accounts as one investment (one bucket of money). I have an excel spreadsheet where i track all holdings by account and by stock. As i make trades i update my spreadsheet (takes only a few minutes). So i know in real time all the stock/sector weightings for my total portfolio. I also have average cost (as i usually hold positions in multiple accounts) and dividend information in my one page summary. Portfolio weighting is what i really care about. I find this big picture view is exceptionally important and useful.

 

What i think about the most is:

1.) do i want to own a stock?

2.) if yes, what position size do i want?

- a starter position for me is usually a minimum 0.5% to 0.75% of my total portfolio

- as an example, i re-established a position in WRB again late today when the stock fell back below $60. I made it a 1.5% position. Larger than a usual starter position. But i understand the company and industry pretty well so i am ok going a little bigger. 

- when i make my first purchase of a stock i also think about how big i want to make it should the stock keep selling off. I would be comfortable taking WRB to a 5% position (of my total portfolio) - assuming no change in the story.

3.) what account do i want to hold the stock in?

- tax free or taxable account? Etc etc…

—————-

Every Dec 31 of each year i ‘freeze’ my Excel spreadsheet. I create a copy and make updates in the new year to the new spreadsheet. I also have a summary page that pulls the total values (for each account) from each spreadsheet. I also capture deposits/withdrawals made that year (RESP, RRSP, TFSA, taxable accounts). My records now go back 25 years. So i know exactly what my long term results have been. For every account. And in total. Factoring in deposits and withdrawals. Yes, a little work along the way. But extremely helpful/useful. Most of the work is getting it set up. 

Edited March 23, 2023 by Viking

[nwoodman]

2 hours ago, Viking said:

i re-established a position in WRB again late today when the stock fell back below $60

Yep, very tempting at this level

[sleepydragon]

Of course to make a lot of money one needs to concentrate. But to make even more money one needs to concentrate and hold for a long time. But a normal person who does that will be sleeping all the time and hardly improves and learn anything.

 

so I think the best way is to keep making small bets, and when lightning strike, go big and concentrated in a name. Say, keep 80% of your money in a couple of names, and 20% each 2% in a dozen names 

[KCLarkin]

This reminds me of a painful error. About 7 years ago, I researched on Copart. Didn't buy any, no idea why. Probably because I didn't have spare cash. Or I was waiting for a sell-off.

 

But during that research, I came across an article titled "The Most Exceptional Company in America -- But Why?"

 

Had someone read that article and simply purchased the statistically "Most Exceptional Company", they would have >30% CAGR over eight years.

 

Looking at the Copart chart, there might have been a few opportunities for an astute investor to get higher returns by trading around the position. But also plenty of opportunities to miss out on that compounding (as I did).

 

---

Bottom line: there are plenty of ways to make money in this business. You have to pick the one that best suits your personality, even if sub-optimal. 

 

 

[Saluki]

I think Peter Lynch was right when he said the most important organ in investing isn't the head, it's the stomach.  If you had held the nifty fifty stocks in the 70s, you would be down 80% at some point, and if you kept holding it for another 30 years, they would've come back, but how realistic is it that someone would have the emotional ability to hold on that long.  A lot of legendary investors do things that are mathematically sub optimal but work for them. 

 

Peter Cundill would sell half of his position when a stock doubled so that he would feel like the pressure was off because he couldn't lose the original amount he invested. Peter Lynch would call that cutting the flowers and watering the weeds.  As your number of positions increases, it becomes increasingly harder to beat the index, but Lynch had hundreds of positions. 

 

The recently deceased Rakesh Jhunjhunwala, was worth a few billion when he died.  A huge chunk of that was from one stock that he bought and never sold, but he did also buy and sell other positions rapidly and even founded an airline right before he died (which is the worst business in the world, besides the dairy business). Maybe the other active, hectic stuff kept him distracted so that he was able to not sell the golden goose position for decades?

 

I heard of another investor who only puts in buy/sell orders after hours so that he's not looking at blinking red and green numbers and letting his emotions take over.  Buffett says that he reads the 10k and then decides to try to figure out what a company is worth without looking at the stock quote. He acknowledges that even he is prone to anchoring bias. 

 

In this vein, maybe the best course is figuring out what your personality is and coming up with strategies to compensate for your blindspots or your emotions and then devise a strategy based on that.  I started a second trading account at another broker when my main account got too far over the SIPC amount (I know, but I'm a worrier).  I do much less trading on that account, because it's only on my phone, not on my desktop computer, so it's not in front of me all day.  I have to seek it out to do something. I think when I'm fully deployed, maybe I should find a way to keep myself from looking at my main account.  If I have no extra cash and I wasn't planning on selling something, why am I looking at it and thinking about moving things around? 

 

Buy and hold works great because (at least among professional managers) the amount of trading activity is inversely corellated with performance.  The only exception is quant funds that trade in nano seconds.  But to be able to hold for decades, you have to find a way to not be tempted to sell.  

 

 

[dealraker]

While I am in the so-called concentration camp, I do not think you initially need to be concentrated early in life to do well.  My bias as to this outcome is that selling your best stocks (that's the ones you bought that eventually went up the most - whether you still owned them or not) is a huge detriment to a good outcome.

 

I was trained by Marshall Johnson, the man who introduced my family to what he called "crackerjack Warren Buffett", towards the concept of "you can't make up with new ideas what you lost by selling great businesses."  There's all kinds of ways to look at this setting, but this too is surely one of them.

 

If you hold a bunch of stocks for the long run?  Oh, it is a certainty: You WILL be concentrated.  It is inevitable.  

 

 

Edited March 24, 2023 by dealraker

[Spekulatius]

The survivorship bias with concentrated investors is something we all need to keep in mind. How many  Dealbrakers are there for any @dealraker. How many Buffons (or Biglaris etc) for every Buffett? I know quite a few people who blew up their retirement account in the tech stock bubble in 2000. Lots of great performing growth stock investor blew up in 2022 and destroyed their track record.

 

It’s a super hard game and many underestimate the impact of luck and path dependency on the ultimate outcome. I would posit that if you intend to play this game long term, surviving need to be the first and second bullet point on your checklist. Diversification does that- other take losses quickly. Thats not to say that you shouldn’t sometimes swing big or perhaps try the coffee can approach, but if you roll the dices too many times, 2 sixes will come up eventually.

[Cod Liver Oil]

@Spekulatius Buy and hold is very endpoint dominant. You hope you will catch some secular tailwinds in your time net and you will have the enviable problem of over-concentration at the end of your measured period. Question for @dealraker: you seem to think big tech has seen  the moment of its greatness flicker. I have no clue and am blinded by sunk cost bias and low basis bias among others, but as AI grows in importance, big data sets become the only available building material and scale is a necessary prerequisite for success. Companies with huge data libraries and fat balance sheets and large platforms would seem to have an advantage over nimble small scale capital constrained innovators, no? Is Google a Kodak, GE or IBM in your mind? It takes a lot of resources to build quantum computers. I suspect Apple, Google and MSFT  will lead the next generation of compute and creative destruction will take place within and between the dominant companies.

[scorpioncapital]

buy & hold requires a very strict criteria combined with a very good insight into what businesses do well and which flounder. The reason isn't always clear. I watch some very expensive stocks and see them do well. Even longer term. Figure out why. Also keep in mind that markets tend to revert in cycles so that the market timer may get in and out but even one big mistake on timing can make it perform no better than buying and holding through the drawdowns.

[Spooky]

2 hours ago, Spekulatius said:

How many  Dealbrakers are there for any @dealraker. How many Buffons (or Biglaris etc) for every Buffett?

 

Beautiful Spek

[dealraker]

1 hour ago, Cod Liver Oil said:

@Spekulatius Buy and hold is very endpoint dominant. You hope you will catch some secular tailwinds in your time net and you will have the enviable problem of over-concentration at the end of your measured period. Question for @dealraker: you seem to think big tech has seen  the moment of its greatness flicker. I have no clue and am blinded by sunk cost bias and low basis bias among others, but as AI grows in importance, big data sets become the only available building material and scale is a necessary prerequisite for success. Companies with huge data libraries and fat balance sheets and large platforms would seem to have an advantage over nimble small scale capital constrained innovators, no? Is Google a Kodak, GE or IBM in your mind? It takes a lot of resources to build quantum computers. I suspect Apple, Google and MSFT  will lead the next generation of compute and creative destruction will take place within and between the dominant companies.

Of course I missed Microsoft and Intel amongst others in their early years, I'd surely not be discussing sloth stocks like Berk and AJG if I'd been in those rocket ships.  But MSFT did weaken to a 12 PE stock and I waded in; Google(Alphabet) for some reason to me around its $400 range looked good; and I've slobbered all over the place with META including starting to buy at $11-and-something all the way up to $230 or so.  And I have a slew of small technology spin-off stocks, those things that just show up in the account one day.

 

But I do own all kinds of what I consider "techy" stocks that aren't considered tech.  I think some of the tech (that I really don't consider too techy myself) such as Alphabet/Meta are such now, actually have been for sometime, that you just can't buy in stupid fashion and "come out" way ahead.  Being in the right "names" in this bunch as they say is now possibly more of a be in the right starting point.  As mentioned I did get some MSFT back in the later Balmer years; damn 12 PE starting point turned out ok...especially when the PE tripled.  

 

There is one stock in technology and other businesses that I think gets a very special treatment, that is the use of numbers treatment, as per being a bust-down-the-doors-screaming buy-buy-buy that I think will almost surely be a 20 year no gain thing on the chart at some point.  I'll defer from listing that idea just yet, there's never a good reason to stick your hand in a hornets nest.  

 

As I ramble off tech, I don't think BN gets a fair view by its followers either.  Bruce is a salesman first; value investor comes far second.  I debated for years about BPY with a guy who had hundreds of followers who tormented me...me being the idiot with his hand in the hornets nest.  I was not at all successful in my debate to say the least.  There's a huge belief that Bruce took in BPY on the cheap.  I think, and have thought for years and years, that BPY has negative value.  I also am also very-very-very-very interested in upcoming interest costs for BN and that interest (so to speak) isn't about BPY or BPG at all.

 

But I don't sell BN.  Why?  Because again, when I look in to the mirror I don't see a genius...that's why!  LOL.  Being silly.  Have a good day.

Edited March 26, 2023 by dealraker

[Munger_Disciple]

5 hours ago, Spekulatius said:

The survivorship bias with concentrated investors is something we all need to keep in mind. How many  Dealbrakers are there for any @dealraker. How many Buffons (or Biglaris etc) for every Buffett? I know quite a few people who blew up their retirement account in the tech stock bubble in 2000. Lots of great performing growth stock investor blew up in 2022 and destroyed their track record.

 

It’s a super hard game and many underestimate the impact of luck and path dependency on the ultimate outcome. I would posit that if you intend to play this game long term, surviving need to be the first and second bullet point on your checklist. Diversification does that- other take losses quickly. Thats not to say that you shouldn’t sometimes swing big or perhaps try the coffee can approach, but if you roll the dices too many times, 2 sixes will come up eventually.

 

  This is a great post. Survivorship bias is a real problem with the concentration strategy and it won't work for most people. It takes a unique skill and temperament to succeed at it (Munger, Buffett). It is worth remembering that even Munger & Buffett's buddy Rick Guerin blew up with this strategy even though he somewhat partially recovered from it with his real estate investments.  We only see mostly the successes resulting from the strategy but never the huge number of blowups. Even Buffett & Munger are hugely diversified later in their life through their ownership of Berkshire which owns a variety of businesses. 

Edited March 26, 2023 by Munger_Disciple