Diversification

[Blake Hampton]

I created a spreadsheet, including some of my favorite investors, that lists their respective position sizes for each of their top 15 equity holdings. I read a excerpt written by Buffett a while back that aligns with the data, so I found it sort of interesting. The excerpt:

 

"Charlie and I operated mostly with five positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest."

 

The data is updated for Q3 2024 (in %):

 

	AVERAGE	Bill Gates	Bill Ackman	Guy Spier	Howard Marks	Li Lu	Prem Watsa	Robert Vinall	Seth Klarman	Warren Buffett
Stock 1	25.2	27.6	13.5	22.7	26.0	29.0	28.2	27.4	26.1	26.2
Stock 2	17.3	22.6	13.2	19.9	10.6	20.6	20.5	17.7	15.0	15.4
Stock 3	12.2	14.8	12.9	11.4	6.8	17.1	13.4	13.7	7.9	11.9
Stock 4	11.2	14.3	12.9	10.7	5.1	16.7	11.1	12.3	7.0	10.8
Stock 5	7.5	6.4	11.3	9.8	3.2	9.3	5.1	9.1	7.0	6.6
Stock 6	5.7	3.3	11.2	7.3	2.8	3.1	4.1	8.9	6.0	4.9
Stock 7	4.8	3.0	9.9	7.3	2.6	3.0	2.4	5.1	5.6	4.4
Stock 8	3.9	1.6	9.8	4.5	2.5	1.3	2.2	4.7	4.3	4.3
Stock 9	2.5	1.5	5.1	2.0	2.4		1.8	0.4	4.2	2.9
Stock 10	1.8	1.2	0.4	1.8	2.3		1.5	0.4	4.1	2.2
Stock 11	1.6	0.9		0.9	2.3		1.5	0.4	3.6	1.3
Stock 12	1.4	0.5		0.8	2.1		1.4		2.5	1.1
Stock 13	1.3	0.4		0.7	2.1		1.2		2.3	0.9
Stock 14	1.0	0.3		0.4	2.0		1.1		1.3	0.9
Stock 15	1.0	0.3			1.9		0.8		1.3	0.9
Top 5	73.4	85.7	63.7	74.5	51.7	92.7	78.4	80.0	62.9	70.9
Top 10	92.1	96.3	100.0	97.2	64.3	100.0	90.5	99.6	87.1	89.7
Top 15	98.4	98.6	100.0	100.0	74.7	100.0	96.5	100.0	98.2	94.8

 

Edited November 14 by Blake Hampton

[Blake Hampton]

Note the above is only for their equity portfolios. Benjamin Graham's take on broad diversification:

 

"We recommended that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75%, with the converse being necessarily true for the common-stock component; that his simplest choice would be to maintain a 50–50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say, 5%. As an alternative policy he might choose to reduce his common-stock component to 25% “if he felt the market was dangerously high,” and conversely to advance it toward the maximum of 75% “if he felt that a decline in stock prices was making them increasingly attractive.”"

 

I wouldn't recommend long-term fixed income at all right now, but this argument could instead be referenced using cash as a substitute. This is the tricky part for me as I think it's hard to gauge just how much to leave outside of equities in any given period.

 

Considering his financial assets, Buffett is currently half cash and half equities

Edited November 14 by Blake Hampton

[schin]

4 hours ago, Blake Hampton said:

I created a spreadsheet, including some of my favorite investors, that lists their respective position sizes for each of their top 15 equity holdings. I read a excerpt written by Buffett a while back that aligns with the data, so I found it sort of interesting. The excerpt:

 

"Charlie and I operated mostly with five positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest."

 

The data is updated for Q3 2024 (in %):

 

	AVERAGE	Bill Gates	Bill Ackman	Guy Spier	Howard Marks	Li Lu	Prem Watsa	Robert Vinall	Seth Klarman	Warren Buffett
Stock 1	25.2	27.6	13.5	22.7	26.0	29.0	28.2	27.4	26.1	26.2
Stock 2	17.3	22.6	13.2	19.9	10.6	20.6	20.5	17.7	15.0	15.4
Stock 3	12.2	14.8	12.9	11.4	6.8	17.1	13.4	13.7	7.9	11.9
Stock 4	11.2	14.3	12.9	10.7	5.1	16.7	11.1	12.3	7.0	10.8
Stock 5	7.5	6.4	11.3	9.8	3.2	9.3	5.1	9.1	7.0	6.6
Stock 6	5.7	3.3	11.2	7.3	2.8	3.1	4.1	8.9	6.0	4.9
Stock 7	4.8	3.0	9.9	7.3	2.6	3.0	2.4	5.1	5.6	4.4
Stock 8	3.9	1.6	9.8	4.5	2.5	1.3	2.2	4.7	4.3	4.3
Stock 9	2.5	1.5	5.1	2.0	2.4		1.8	0.4	4.2	2.9
Stock 10	1.8	1.2	0.4	1.8	2.3		1.5	0.4	4.1	2.2
Stock 11	1.6	0.9		0.9	2.3		1.5	0.4	3.6	1.3
Stock 12	1.4	0.5		0.8	2.1		1.4		2.5	1.1
Stock 13	1.3	0.4		0.7	2.1		1.2		2.3	0.9
Stock 14	1.0	0.3		0.4	2.0		1.1		1.3	0.9
Stock 15	1.0	0.3			1.9		0.8		1.3	0.9
Top 5	73.4	85.7	63.7	74.5	51.7	92.7	78.4	80.0	62.9	70.9
Top 10	92.1	96.3	100.0	97.2	64.3	100.0	90.5	99.6	87.1	89.7
Top 15	98.4	98.6	100.0	100.0	74.7	100.0	96.5	100.0	98.2	94.8

 

@Blake Hampton - I never heard of Robert Vinall. What's his claim to fame?

[UK]

33 minutes ago, schin said:

@Blake Hampton - I never heard of Robert Vinall. What's his claim to fame?

 

He has quite nice track record and in my opinion his letters and other writings on investing are very good. I would highly recommend reading him.

[UK]

4 hours ago, Blake Hampton said:

"Charlie and I operated mostly with five positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest."

 

This is basically the way I also do diversification, only for a few exeptions breach this upper limit and also own some smaller/more speculative things up to 20 percent of portfolio.

[TwoCitiesCapital]

15 hours ago, Blake Hampton said:

Note the above is only for their equity portfolios. Benjamin Graham's take on broad diversification:

 

"We recommended that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75%, with the converse being necessarily true for the common-stock component; that his simplest choice would be to maintain a 50–50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say, 5%. As an alternative policy he might choose to reduce his common-stock component to 25% “if he felt the market was dangerously high,” and conversely to advance it toward the maximum of 75% “if he felt that a decline in stock prices was making them increasingly attractive.”"

 

I wouldn't recommend long-term fixed income at all right now, but this argument could instead be referenced using cash as a substitute. This is the tricky part for me as I think it's hard to gauge just how much to leave outside of equities in any given period.

 

Or gold. 

 

Fixed income's problem is when interest rates fail to exceed inflation. Gold primarily does well when interest rates fail to exceed inflation. It's a natural hedge and a natural substitute to nominal bonds without the duration impact of TIPS offsetting the inflation adjustment. It has complimentary risk factors to fixed income while also regularly serving as a "risk off" investment so I typically consider my gold allocations as part of my fixed income portfolio and used it as a substitute for long-bonds back in 2021/2022. 

 

15 hours ago, Blake Hampton said:

I created a spreadsheet, including some of my favorite investors, that lists their respective position sizes for each of their top 15 equity holdings. I read a excerpt written by Buffett a while back that aligns with the data, so I found it sort of interesting. The excerpt:

 

"Charlie and I operated mostly with five positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest."

 

 

I personally have a position limit of 10% of my net worth (not necessarily my portfolio) on any 1 stock. And the stocks that I tend to take it there themselves are more conglomerates like Fairfax or Exor - so perhaps I could afford to loosen that some and bump it to ~15% for diversified companies. I've just had many large positions go against me while my small ones tended to do best so I was trying to correct for the error of overconfidence and equal weighting which would have seen me do significantly better earlier on in my investment career. 

 

The way I've always characterized it is that concentration is for wealth building...if you're right...and diversification is for regret minimization if you realize you could be wrong. I try to straddle a middle road. I concentrate 5-10% in each of a handful of names and diversify the rest.

[Blake Hampton]

3 hours ago, TwoCitiesCapital said:

 

Or gold. 

 

Fixed income's problem is when interest rates fail to exceed inflation. Gold primarily does well when interest rates fail to exceed inflation. It's a natural hedge and a natural substitute to nominal bonds without the duration impact of TIPS offsetting the inflation adjustment. It has complimentary risk factors to fixed income while also regularly serving as a "risk off" investment so I typically consider my gold allocations as part of my fixed income portfolio and used it as a substitute for long-bonds back in 2021/2022. 

 

 

I personally have a position limit of 10% of my net worth (not necessarily my portfolio) on any 1 stock. And the stocks that I tend to take it there themselves are more conglomerates like Fairfax or Exor - so perhaps I could afford to loosen that some and bump it to ~15% for diversified companies. I've just had many large positions go against me while my small ones tended to do best so I was trying to correct for the error of overconfidence and equal weighting which would have seen me do significantly better earlier on in my investment career. 

 

The way I've always characterized it is that concentration is for wealth building...if you're right...and diversification is for regret minimization if you realize you could be wrong. I try to straddle a middle road. I concentrate 5-10% in each of a handful of names and diversify the rest.

I'm not really a huge fan of gold but I don't completely doubt the reasons behind it. I personally like T-bills.

Edited November 15 by Blake Hampton