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Mohnish bought $40 million worth of BAC


berkshiremystery
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Still, is it my imagination or is he drifting back towards a 10 stock portfolio?

 

http://www.gurufocus.com/news/118805/pabrai-funds-09-annual-meeting-transcript--munger-told-him-less-not-more-diversification

 

"The second point is about concentration. In fact, I brought this issue up at a lunch I had with Charlie Munger a few months ago, and I started to tell Charlie how I had moved away from ten positions to more diversified 20 positions. So before I could even finish the sentence, he said to me, "You are thinking in a manner that is completely opposed to the way I think." He said, "You know that I'm not going to be giving you any type of support on this movement towards more diversity." And he went on to say that his own assets, obviously, are very concentrated at Berkshire and two or three other places. So I told him, "Charlie, the thing is that there's a difference between running your own money and running other people's money. When I'm running other people's money and I have very high volatility and the money leaves, I have no opportunity to ever make the money back for the investors. That's a permanent loss. In fact last year 15 percent of our assets left. We are up more than 100 percent since then, but we have no opportunity to make it up to those investors that left."

 

So I was surprised when Charlie changed his perspective and said, "You know, if you examine Berkshire Hathaway, and if you think of all the positions, like See's Candies or NetJets, as bets, by the time you get to the 20th bet, you'll be at about 80 percent of the assets. And so he said, effectively, "We, at Berkshire, are about that level of diversification." So he seemed to be okay with the notion of a less concentrated approach with other people's money or temporary capital.

 

This whole thought started with Seth Klarman. Seth gave a talk about a year ago in which he discussed how he typically makes three to five percent bets. And he said in about 26 or 27 years in business, they've only had about a dozen or so 10 percent bets -- about one every two years or so.

 

And I could clearly see that there have been many instances with Pabrai Funds in which we've made large bets, and we were wrong. When we were wrong, we did not use the Kelly odds properly. If you look at Sears, for example, the value was much higher. I exited at a loss, so whatever number I used in the Kelly formula was wrong. The Kelly formula is great, if you have your numbers down right and you have your probabilities down right. If the probabilities are wrong, then you're off. So that's why with the Kelly formula, you're better off always under-betting the Kelly, probably under-betting it quite substantially. So my take is that even with a ten-by-ten portfolio, we were under-betting the Kelly. With the 20-position portfolio, we will probably under-bet it even more and that's okay"

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I hope so.  I don't think there was anything wrong with his original investment philosophy.  He got hit hard in 2008 because of the general market correction, correlated risk and not enough cash.  The actual 10 stock portfolio wasn't the problem.  You can have 20 stocks and still watch your portfolio go down if you don't have enough cash or there is correlated risk.  Cheers!

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I think having a concentrated portfolio is the way to go but I have found it difficult to do.

 

How do you guys determine what % to put into each holding e.g. even 10% x 10 positions or proportionate to MOS, etc?

 

I kind of like Tim McKelvine method (paraphrasing off the top of my head)-

 

up to 5% if cheap, with a decent balance sheet and an enduring competitive advantage,-

 

up to 10% if cheap, good balance sheet/enduring competitive advantage and significant insider ownership

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He stated he was moving the fund to have a few 2-3% positions, majority 5% positions, and when exceptions appear 10% + positions.  It appears he is finding very compelling investments or he has more AUM than we expect and has quite a bit on foreign exchanges.

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Biaggio,

Consider the possibility that it is a very personal matter and is not the same for any two investors. The critical factor is your hit rate (also called strike or success rate) and any serious investors should have a good grasp of what their rate is.

 

Note: For those who are not familiar with the concept of a hit rate, in its basic form, it is how many times your stock picks turn out to be correct. So, say you invested in 10 stocks then are they worth more or less 3 years later and God forbid any bombed. If all 10 are worth more then your hit rate is 100%, only 5 then 50%, etc.

 

I have it on good (not absolute) authority that Munger's (and Buffett's) is in the high 90's. So if you have a very high rate you can concentrate more and conversely you should be a 5 percenter if you hug the 50's.

 

Most importantly; if you err, err on the downside because that is what will kill you. Not making us much as you could have is painful, but never lethal.

 

Just something to consider.

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Biaggio,

Consider the possibility that it is a very personal matter and is not the same for any two investors. The critical factor is your hit rate (also called strike or success rate) and any serious investors should have a good grasp of what their rate is.

 

Note: For those who are not familiar with the concept of a hit rate, in its basic form, it is how many times your stock picks turn out to be correct. So, say you invested in 10 stocks then are they worth more or less 3 years later and God forbid any bombed. If all 10 are worth more then your hit rate is 100%, only 5 then 50%, etc.

 

I have it on good (not absolute) authority that Munger's (and Buffett's) is in the high 90's. So if you have a very high rate you can concentrate more and conversely you should be a 5 percenter if you hug the 50's.

 

Most importantly; if you err, err on the downside because that is what will kill you. Not making us much as you could have is painful, but never lethal.

 

Just something to consider.

 

You're right.  Warren's hit rate is better by far than any other investor -- ever!  Charlie's isn't far behind since he stopped investing in tech 50 years ago, although he has an occasional lapse like the more risky BYD.

 

  However, when Warren takes a special preferred deal, it means the odds are lower.  His large positions in 100 year old US companies, especially BRK itself, are most likely to work out well. 

 

Charlie's right.  Having a very large percentage of capital in one situation is a very good idea if you know the odds are favorable and the probabilities of success are >.95

 

If you can't make that prediction with realistic confidence, don't go there unless you like to ride a roller coaster.  Better to buy an index fund if you have little realistic knowledge which of your potential stock picks are going to be the winners in a flat to bearish market.

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Thanks for above posts.

 

I suppose you have to know your own "hit rate" or "success rate" in the past.

 

I have never gone back + actually estimated that. Do you guys look back + actually calculate that? (seems obvious now that you mention it...then again just because you  are down in price does not necessarily mean your wrong...in my case it probably does, but you know the usual argument here)

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I might misread this topic but why would your hit rate determine the amount of stocks you should have in your portfolio? If you focus on high probability picks a concentrated portfolio will only give you lumpier returns but over time your overall return won't be different compared to a highly diversified portfolio, no matter what your hit rate is. Unless of course you have a very low hit rate (due to low probability picks or just lacking skill) combined with a concentrated portfolio, which could kill you. But opting for a lot more stocks and less research per stock is only going to get your hit rate down, not up.

 

Imo, the only sensible reason to have a 'very' diversified portfolio (35-50+ stocks) is because your fund is to big for the stocks you are investing in or because you are buying groups of stocks with low probability that as a group should do fine. If not, you will be spending both research time and money on lesser ideas which translates in lower returns.

 

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I might misread this topic but why would your hit rate determine the amount of stocks you should have in your portfolio? If you focus on high probability picks a concentrated portfolio will only give you lumpier returns but over time your overall return won't be different compared to a highly diversified portfolio, no matter what your hit rate is. Unless of course you have a very low hit rate (due to low probability picks or just lacking skill) combined with a concentrated portfolio, which could kill you. But opting for a lot more stocks and less research per stock is only going to get your hit rate down, not up.

 

Imo, the only sensible reason to have a 'very' diversified portfolio (35-50+ stocks) is because your fund is to big for the stocks you are investing in or because you are buying groups of stocks with low probability that as a group should do fine. If not, you will be spending both research time and money on lesser ideas which translates in lower returns.

 

Yah that's what the guys are saying I believe. i.e. investor should know that they are betting on high probability picks or low probability pick and adjust their allocation accordingly (also need to factor in how good you are at picking high vs low probability picks---everybody thinks that they are above average at whatever, it maybe instructive to look back to see how good one really is)

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Biaggio,

I missed your earlier question. In my experience very few investors measure/calculate it and not that many professional fund managers either, which is in my humble opinion a big mistake. I have also not met anyone that measures it that did not find it to be extremely revealing about their strengths and weaknesses and had a significant impact on their investment behavior.

 

I do measure it annually and have done so for many years. You need several years of data (minimum of 3), simply because if you are an investor you will have 3-5 years as a holding period.

 

As someone alluded to earlier. On average we all think we are better than average drivers, but the numbers don't lie.

 

 

 

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Guest ValueCarl

Am I reading this thread correctly surrounding Mohnish Pabrai and his undying commitments to Fairfax Financial?

 

Are we trying to say that an intelligent investor like Mohnish Pabrai would refrain from selling a "security" which he deemed to be less valuable due to hidden loyalties he maintains for one of his investees who is bolstering his favorite charity?

 

This might be akin to Alice Schroeder only saying kind words about Warren Buffett because she had enjoyed great financial success in writing his autobiography.

 

This might also be synonymous with Warren Buffett buying Level 3 Communications publicly again, in order to assist his close friend and one of his important advisers, Mr. Walter Scott.

 

Say it isn't so, and call Sarah Palin, Sanjeev!  :o Maybe what you're really saying; however, is that Mohnish is always going to get the INSIDE SCOOP! This I understand.  :(       

 

 

<He has not sold Fairfax as far as I know, and I doubt if he will for some time with Prem sitting on his foundation board and providing an annual donation of $1M.  Cheers!>

 

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Biaggio,

Consider the possibility that it is a very personal matter and is not the same for any two investors. The critical factor is your hit rate (also called strike or success rate) and any serious investors should have a good grasp of what their rate is.

 

Note: For those who are not familiar with the concept of a hit rate, in its basic form, it is how many times your stock picks turn out to be correct. So, say you invested in 10 stocks then are they worth more or less 3 years later and God forbid any bombed. If all 10 are worth more then your hit rate is 100%, only 5 then 50%, etc.

 

I have it on good (not absolute) authority that Munger's (and Buffett's) is in the high 90's. So if you have a very high rate you can concentrate more and conversely you should be a 5 percenter if you hug the 50's.

 

Most importantly; if you err, err on the downside because that is what will kill you. Not making us much as you could have is painful, but never lethal.

 

Just something to consider.

 

You're right.  Warren's hit rate is better by far than any other investor -- ever!  Charlie's isn't far behind since he stopped investing in tech 50 years ago, although he has an occasional lapse like the more risky BYD.

 

Why does everyone keep contending that BYD is a lapse in judgment and blaming (as opposed to praising) Mr. Munger for the investment? 

 

Last I checked, Berkshire made a strategic investment that is worth a hell of a lot more than they paid for it in a company that's just getting started.

 

Once again, investors' lack of capacity to suffer gets the best of them.

 

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Ditto.

Have you ever heard of an actual number for either Charlie or Warren? Would like to know what their actual hit rates are; apparently they do actively measure it.

 

Don't know their batting number, but I would suspect your comment about it being in the 90's is about accurate.  A few years ago, Munger said that Buffett has never allocated capital in Berkshire where Berkshire lost more than 2% of equity.  So, not only is their batting average high, but their downside is generally extremely low.  Cheers! 

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Guest ValueCarl

This is funny, and might be why Ben Graham tried to capture me in his wood chipping machine today!  ;) Although he did suggest Brker_guy and txlaw would be Palin fans also, something which I hadn't picked up personally.

 

When I referenced Palin earlier in this thread, I was not aware of her hanging remarks--oblivious to noise in the news mostly--and was only using the prior VP debate she had with Biden when she said in her quirky Sarah way, "Say it ain't so, Joe!"  :D

 

A mostly innocent man can get in a lot trouble on this board!  ;D  To say "mostly innocent" is only to reiterate that, there are NONE who are perfectly INNOCENT among us!  >:(   

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Am I reading this thread correctly surrounding Mohnish Pabrai and his undying commitments to Fairfax Financial?

 

Are we trying to say that an intelligent investor like Mohnish Pabrai would refrain from selling a "security" which he deemed to be less valuable due to hidden loyalties he maintains for one of his investees who is bolstering his favorite charity?

 

This might be akin to Alice Schroeder only saying kind words about Warren Buffett because she had enjoyed great financial success in writing his autobiography.

 

This might also be synonymous with Warren Buffett buying Level 3 Communications publicly again, in order to assist his close friend and one of his important advisers, Mr. Walter Scott.

 

Say it isn't so, and call Sarah Palin, Sanjeev!  :o Maybe what you're really saying; however, is that Mohnish is always going to get the INSIDE SCOOP! This I understand.  :(       

 

 

<He has not sold Fairfax as far as I know, and I doubt if he will for some time with Prem sitting on his foundation board and providing an annual donation of $1M.  Cheers!>

 

Carl, the Mohnish/Fairfax comment was meant tongue-in-cheek...that he won't sell with Prem on his foundation board.  Not unlike ourselves, Mohnish has no loyalty to management, but would do what is in the best interest of his partners and fund.  We both love Prem, but we have to manage risk and our funds without taking that into consideration.  Cheers!

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