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Bob Rodriguez 25 years experiment on Concentration


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I found this tidbit from an recent interview quite interesting as can be seen on page 4 on the Pdf link below.

All he did is have 5 names instead of 20-40 in the Capital fund. And all the stocks came from that fund as well.

Really cool test :D

 

"From June 30, 1984 to December

31, 2009, when I stepped down from lead

management, the Capital Fund had compounded at approximately 15% per year.

But this IRA account had a compound

rate of return of 24%"

 

http://www.fpafunds.com/docs/media/2013-07-31-vii-with-db-and-rr-with-disclosures-v2.pdf?sfvrsn=2

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I have seen this work in practice in some cases (Fairholme, the portfolios of Graham and Doddsville and my own portfolio over the past few years) and less so in others (Chou and McElvaine).  In the less so cases I have not been able to isolate a cause.  Although Tim has provided a pretty good post mortem on the largest shortfalls of his under performance (leveraged companies in flat or declining industries that could not pay there debt back).  In each case though, they have beat the market it is just a matter of by how much.

 

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Just wondering, how concentrated are the forum members normally?

 

I run a 15-25 stock portfolio. During the 2008-2009 downturn there were many more names because lots of things were cheap, and I thought a basket approach would minimize risk. Currently though, I'm much more concentrated, with 22% of the portfolio in one stock and large 8% or so positions in others.

 

I think if you run a 5 stock portfolio, it places a large premium on being right, whereas a diversified portfolio composed of value picks will likely work out on an actuarial basis.

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I am about 60% in my top 5.  This leads to more volatility but also for me more focus.  It forces me to make the decision about buying cheap stocks considering the downside risks.  This leads to larger declines in down markets (50% in 2008) but hopefully higher returns across a cycle.  The way I look at stocks is they have a quantum of value and the price may not reflect that quantum.  So I want to weight my portfolio to maximize the price/value difference.  If I diversify, I dilute that difference.  In the extreme (most mutual funds), the dilution is so great it is very difficult to beat the market index.  The more you know about the companies and their intrinsic values the less dilution you require to achieve an acceptable level of volatility.

 

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My take is a starter position is 7% and can easily become 14%. Then I have like bond investments LRE, FFH 12% to 15%.

And 9 Positions in total with cash being 1 at 20% and top 5 at 55%.

That's my latest setup but I am sure over time this will change.

 

To add is that before I started investing in stocks I read allot of Index investing.

And taking a playbook of index-investing according to David Swensen anything below 5% does not have any real impact on the portfolio. So 7% to start :D

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Around 90% in my top 6 - 8 ideas.  I am learning the value of sticking to my best ideas and saying away from lesser ideas.

 

Roughly in order:

BAC - my leap position is 100 % hedged again at current levels.  Also have warrants and common

Aig - warrants, common, and leaps

SSW - largest common position

 

Smaller In no particular order:

RBS preferreds

WFC - common & warrants

JPM - common & warrants

Extendicare

FFH

 

& other - very small. 

 

I have built part of my holdings to generate dividends to finance a couple of years away from work.

 

Returns similar to Rodriguez experiment, after tax, over 9 years with leverage.  The leverage roughly cancels out his non payment of taxes in his IRA experiment. 

 

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Over 100 positions, about 30% cash.  I couldn't care less about any individual stock.  In my grocery store all inventory is available for sale.  I buy what's cheap and sell what's not.  I don't hang any stock on a wall to marvel at it's beauty.  My stocks are shoved into a storage room and are spilling out into the aisles.  It might not be beautiful, but wander the aisles and there's plenty to choose from.  Everything from packs of gum to Diet Coke to a brush for the grill to filet mignon. 

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This is a great discussion.  I have been going back and forth myself regarding portfolio sizing.  While I certainly appreciate the merits of allocating heavily to your best ideas, I also find that you can never know everything.  Personally I think things are ideal around 10 stocks, this is sufficient diversification but turnover is reasonable enough that I am not crushed trying to find ideas.

 

The one strong counter-example is Peter Lynch who just beat the living crap out of the averages for about 15 years while holding hundreds and ultimately over a thousand companies.

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I have seen this work in practice in some cases (Fairholme, the portfolios of Graham and Doddsville and my own portfolio over the past few years) and less so in others (Chou and McElvaine).  In the less so cases I have not been able to isolate a cause.  Although Tim has provided a pretty good post mortem on the largest shortfalls of his under performance (leveraged companies in flat or declining industries that could not pay there debt back).  In each case though, they have beat the market it is just a matter of by how much.

 

Packer

 

Hey Packer ... do you have a link to where Tim provides the post mortem of the under performance?

 

I can certainly think of one of his names 'Galcier Media' that comes to mind that qualifies for the leveraged company in a flat/declining industry'. Although it does have a very strong business information business and is owner operated (>30% ownership). The stock is just getting pummelled ...

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Kraven,

I think your method is probably going to beat my concentrated portfolio composition. However, Like Munger said this year he is still learning and its so much more "fun" to invest in a few companies where you actually might admire the management. Not saying all my stocks are like that but around half at the moment. Plus I am to lazy to keep track of 100 positions :D 

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Over 100 positions, about 30% cash.  I couldn't care less about any individual stock.  In my grocery store all inventory is available for sale.  I buy what's cheap and sell what's not.  I don't hang any stock on a wall to marvel at it's beauty.  My stocks are shoved into a storage room and are spilling out into the aisles.  It might not be beautiful, but wander the aisles and there's plenty to choose from.  Everything from packs of gum to Diet Coke to a brush for the grill to filet mignon.

 

Kraven,

 

1) I couldn't agree more with your attitude of "I couldn't care less about any individual stock...I don't hang any stock on a wall to marvel at it's beauty."

 

2) I'm curious to know how you keep track of so many positions. How do you follow each company's news, note your most recent estimates of each company's intrinisic values, and ultimately keep up with it all to make sure you sell when the stock price is no longer cheap. I have the exact same philosophy as yours, but I implement it by holding far fewer companies. Since I am buying on the basis of cheapness alone (as opposed to high quality business model/management) I consider it far more important to scrutinize management's decisions and stay up to date on any relevant information I can find on the companies. In practice, I end up with 5-15% positions, and a very large cash balance (but that is also partly because most of my investments are in pretty small, illiquid companies)

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Kraven,

I think your method is probably going to beat my concentrated portfolio composition. However, Like Munger said this year he is still learning and its so much more "fun" to invest in a few companies where you actually might admire the management. Not saying all my stocks are like that but around half at the moment. Plus I am to lazy to keep track of 100 positions :D

 

I don't know about that.  I'm as competitive as the next guy, but what does it matter?  I'm not out to beat anyone.  I simply need to achieve satisfactory, absolute results.  Relative results don't support the family.  We can all do well, everything being equal.  It's not a zero sum game in that respect.  If your concentrated portfolio does great, well I can still do just fine too and vice versa.

 

At the end of the day, Mike Burry said it best.  Know thyself.  If you are the intellectual heir to Buffett and Munger, then by all means follow that road.  Hell, if I could, I would.  If I could tell which companies would be doing great in 10-20 years that's what I would be doing too.  I can't.  To me all of "those" companies always seem expensive.  Sure, if I could buy AAPL, IBM, DVA, etc at BV, I would toss other things and do so.  Absent that, I do what I do. 

 

The biggest mistake I think investors make is trying to be someone they aren't.  If you are uncertain about things and believe we don't know what we don't know, then perhaps having 5 20% positions isn't the wisest course of action.  If on the other hand, you are able to do so, then that's the path you should follow.

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Over 100 positions, about 30% cash.  I couldn't care less about any individual stock.  In my grocery store all inventory is available for sale.  I buy what's cheap and sell what's not.  I don't hang any stock on a wall to marvel at it's beauty.  My stocks are shoved into a storage room and are spilling out into the aisles.  It might not be beautiful, but wander the aisles and there's plenty to choose from.  Everything from packs of gum to Diet Coke to a brush for the grill to filet mignon.

 

Kraven,

 

1) I couldn't agree more with your attitude of "I couldn't care less about any individual stock...I don't hang any stock on a wall to marvel at it's beauty."

 

2) I'm curious to know how you keep track of so many positions. How do you follow each company's news, note your most recent estimates of each company's intrinisic values, and ultimately keep up with it all to make sure you sell when the stock price is no longer cheap. I have the exact same philosophy as yours, but I implement it by holding far fewer companies. Since I am buying on the basis of cheapness alone (as opposed to high quality business model/management) I consider it far more important to scrutinize management's decisions and stay up to date on any relevant information I can find on the companies. In practice, I end up with 5-15% positions, and a very large cash balance (but that is also partly because most of my investments are in pretty small, illiquid companies)

 

GG,

 

In terms of keeping track of positions, IV, etc. I use a spreadsheet.  In terms of news, nothing special.  I use Yahoo finance, google alerts, various feeds, etc.  Remember that I do this full time too so it isn't a burden to keep up with things. 

 

I also don't really care about quarterly moves and the like, so time isn't usually of the essence to me.  I update what I can, when I can.  I try to prioritize to some extent.  If financials come out on both a larger and smaller position, I will usually look at the larger one's first.  Many of my smaller positions are ones where they are for tracking purposes or where I never was able to fill much of anything.  So to the extent I have 100 shares or something of some illiquid stock, I don't really bother doing much with it. 

 

Hope that helps.

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Kraven,

I think your method is probably going to beat my concentrated portfolio composition. However, Like Munger said this year he is still learning and its so much more "fun" to invest in a few companies where you actually might admire the management. Not saying all my stocks are like that but around half at the moment. Plus I am to lazy to keep track of 100 positions :D

 

I don't know about that.  I'm as competitive as the next guy, but what does it matter?  I'm not out to beat anyone.  I simply need to achieve satisfactory, absolute results.  Relative results don't support the family.  We can all do well, everything being equal.  It's not a zero sum game in that respect.  If your concentrated portfolio does great, well I can still do just fine too and vice versa.

 

At the end of the day, Mike Burry said it best.  Know thyself.  If you are the intellectual heir to Buffett and Munger, then by all means follow that road.  Hell, if I could, I would.  If I could tell which companies would be doing great in 10-20 years that's what I would be doing too.  I can't.  To me all of "those" companies always seem expensive.  Sure, if I could buy AAPL, IBM, DVA, etc at BV, I would toss other things and do so.  Absent that, I do what I do. 

 

The biggest mistake I think investors make is trying to be someone they aren't.  If you are uncertain about things and believe we don't know what we don't know, then perhaps having 5 20% positions isn't the wisest course of action.  If on the other hand, you are able to do so, then that's the path you should follow.

 

Good post.  Know thyself.  I have tried the schloss approach a couple of times and just end up selling stuff at a loss.  I do better the way I do it.  It took years to evolve a style that works.  That being said, I am open to the basket approach in times of extreme markets such as early 2009. 

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Kraven,

I think your method is probably going to beat my concentrated portfolio composition. However, Like Munger said this year he is still learning and its so much more "fun" to invest in a few companies where you actually might admire the management. Not saying all my stocks are like that but around half at the moment. Plus I am to lazy to keep track of 100 positions :D

 

I don't know about that.  I'm as competitive as the next guy, but what does it matter?  I'm not out to beat anyone.  I simply need to achieve satisfactory, absolute results.  Relative results don't support the family.  We can all do well, everything being equal.  It's not a zero sum game in that respect.  If your concentrated portfolio does great, well I can still do just fine too and vice versa.

 

At the end of the day, Mike Burry said it best.  Know thyself.  If you are the intellectual heir to Buffett and Munger, then by all means follow that road.  Hell, if I could, I would.  If I could tell which companies would be doing great in 10-20 years that's what I would be doing too.  I can't.  To me all of "those" companies always seem expensive.  Sure, if I could buy AAPL, IBM, DVA, etc at BV, I would toss other things and do so.  Absent that, I do what I do. 

 

The biggest mistake I think investors make is trying to be someone they aren't.  If you are uncertain about things and believe we don't know what we don't know, then perhaps having 5 20% positions isn't the wisest course of action.  If on the other hand, you are able to do so, then that's the path you should follow.

 

+1.  I run a very concentrated fund, as well as personal portfolio, but I agree that the investor should know thyself.  Cheers!

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I have always maintained a concentrated portfolio with AIG making up nearly 20% of my current portfolio and I currently am holding less than 15 stocks across 3 portfolios I manage 3 portfolios including personal account. I have always used a concentrated value approach.

 

Two big winners this year included two I wrote about on gurufocus

 

Delhaize Group DEG ADR (I recommended DEG ADR on gurufocus last year at around $36) – sold my position out at $67.50 (average cost $33)

ING Group ING ADR (I recommended ING Group ADR on gurufocus last year at $5.96) – haven’t sold my position , current price $11.35 (average cost between mid$6 to $8 across 3 portfolios)

 

Other big winners for me in the last 12 months have included AIG,C,BAC,MBIA

 

Worst investment – (RWM) Short Russell 2000 ETF – hedging losses substantially affected my overall returns  & JC Penney (JCP)(I recommended on gurufocus at around $20 MEA CULPA!)

 

 

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Uccmal,

 

How much leverage have you carried or are you referring the leverage implicit in the warrants?  If you do have leverage do you vary it with time or some other parameter.  TIA.

 

Packer

 

Packer,

 

 

At my peak in the FFH Early leap days(2006) I was running obscene levels of leverage, >50%, but then my portfolio was only 1.5x my annual pay. 

 

These days I stay below 10% margin.  I am sure its the same for you, but we cant borrow against options, and curiously the only warrants that count for margin are the BAC.  AIG, WFC, and JPM cant be borrowed against.  As mentioned my BAC leap position is 100 % hedged. 

 

Ideally, I am aiming to have net cash, but its taking time for my positions to mature (AIG, and BAC).  As the markets rise, and a correction becomes inevitable, sooner, I'll want more and more cash available to redeploy into cheaper stocks. 

 

Hey, thats my style man.

 

Packer, how about you?

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I used to have a leverage mutual fund portfolio pre-2000 but then removed the leverage when we had kids.  I had a good amount of leverage via LEAPs before 2008 but since then I am limited to a small amount in my non-IRA (about 10% in that account) and via some LEAPS (like COF, AIG and LNC).  I don't have much in non-IRA accounts, so my leverage is limited in that sense.

 

Packer 

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  • 2 weeks later...

In thinking more about this topic, it appears that on a diversified basis value investing can add from 1 to 4% annual in terms of returns.  To get higher returns you need either to use leverage (margin, options or warrants), concentration or market timing.  Using Bob's example, the FPA Capital fund is the diversified vehicle (but is also subject to client withdrawls).  FPA Capital returned 15.2% over his experiment period, the S&P 500 10.6% (with dividend) and his top 5 fund 24%.  So his value methodology added 4.6% and the concentration an additional 8.8%.  If you look at the investors in the appendix of the Intelligent Investor you see the same trend the concentrators (Buffet, Munger, Guerin) outperform the diversifiers (WSJ and Tweedy Brown) by about 10% per year.  I am wondering how have the value concentrators versus diversifiers done here.  The 2 styles are for different types of individuals - the diversifiers (more conservative) and the concentrators (more aggressive). 

 

For example (I am a concentrator) and I have 10.5 year returns of about 37% annualized versus the S&P of 8% and the FPA Capital of 11%.  What are other folks experiences?  TIA.

 

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For example (I am a concentrator) and I have 10.5 year returns of about 37% annualized versus the S&P of 8% and the FPA Capital of 11%.  What are other folks experiences?  TIA.

 

Packer

 

Those are some sick results. Well done.

 

I am a concentrator for sure; I can handle volatility. For instance right now I'm 30% WFC, 30% BRK, 15% DTV, 10% GS, 10% LRE.L. 

 

For 10.5 years, returns are 14.2% annualized = 6% outperformance.

For 13.5 years ( when I started), the outperformance is 9% per year.

 

Most of this outperformance can be attributed to just two events/decisions:

 

1) Heavily owning BRK in 00-02 as it went up and the market tanked.

2) In March '09 putting 1/3 of my portfolio each into WFC and AXP at ~$10 each.

 

So have I been smart or lucky? Munger has said getting rich only takes a few decisions...and I was extremely confident in those choices, but still...I would say someone with simliar results spread over many decisions would be on sounder footing.

 

Nonetheless, I'll take it  ;D

 

 

 

 

 

 

 

 

 

 

 

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Packer, Wow you made close to 32 times on each dollar you invested in past 10years, You must be very rich by now. Intresting you still do your day job. I started serious investing from 2008 its been a bumpy ride at march of 2009 my portfolio was down by 70% then recovered and made around 35% by end of 2010(in 2009 and 2010 i was holding around 7 to 8 stocks) and again 2011 another down year of 37% and at end of 2011 i went in obscene concentration of just 3 stocks and sold out GE , USG, Visa etc and concentrated on my 3 best ideas of BAC, MetroPCS and Leap.So, the last 2 years was really great 2012 of 70% and 2013 another 70% so far, This year. i started moving back to diversifying as i started selling MetroPCS and Leap after their mergers but still currently top 4 is 80% of my holdings. I am still willing to go all in with less than 5 positions if i find good pitches so far this year i would say none to my earlier standards patiently waiting.

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