Bob Rodriguez 25 years experiment on Concentration

[Libs]

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

 

 

What made you choose those 2 rather than some of the other beaten down stocks around that time?

 

These were the two I felt I knew the best.

 

There's a story, of course.....and it's etched in our family lore.

 

Sunday March 8(?), 2009, the wife and I are at a car wash and I say, "look, I won't do this if you say no,

but Wells Fargo and AXP are down to $10 and they are worth probably 3X that amount. The market  thinks they are going under. I don't. I want to put 1/3 into each."

 

She shocked me with an immediate "yes."

 

So I was prepared to make the trade Monday morning....I didn't sleep well, and woke up at 3 AM. Absent-mindedly I turned on CNBC, and bam, there was Buffett. And he basically endorsed them both, you know, the way he tells you without actually saying 'buy the stock.' One thing he noted was their $40BB pre tax pre-provision income and how the company was selling for like 3 X that.

 

Every once in a while we go back to that car wash and reminisce  ;D

 

P.S. Some one rudely pointed out later that if you just bought an index of small-cap stocks at that same time, you would have made even more.

 

 

 

[twacowfca]

Even more focused would be a good business with a straight shooting owner that had most of his wealth in the business and a long record of superior returns with the prospect that those returns will continue  indefinitely. Then, all that's needed is a good entry point and willingness to let the compounding begin. That's the surest way to make money, but not the only way. 

 

twacowfca,

you already know that by “first class management” I meant exactly what you have written! ;)

 

There are occasionally decent businesses under stress that are likely to be survivors and can be had at a fire sale price : think BAC.  One offs like BRK with a free quasi put at a strike price equal to the market price or BP when all the scientists were saying that their third  attempted method to cap their well was almost certain to succeed in a couple of days as they had detected that they were only were only a few feet away from it.

 

At such times, putting a huge chunk of assets into such opportunities as many on the board have done isn't as risky as Mr. Market thinks it is.

 

That is much harder for me to do… Though I understand its merit!

It is just that I spend my whole life thinking about business. What works, and what doesn’t. Guess simply not much time left to become shrewd and confident enough to grab opportunities like BAC and BP…

Who knows? Maybe after some time spent on this board… :)

 

giofranchi

[hyten1]

giofranchi,

 

that is interesting, i usually tend to think "everything has its price" it could the ugliest dog in the world but at a certain price i'll take a look at it. its all about the delta btw value and price.

 

see you are more focus on the absolute value not the relative.

 

just my humble opinion.

 

hy

 

I think one of the keys is to find a strategy/volatility level you are comfortable with.  It is not worth getting high returns if it ruins your life due to stress.  I would think that most would not like the type of volatility I have experienced (down over 50%) in 2008.  I try to find value stocks which upon first inspection folks say: yikes!.  Very uncomfortable stocks to own - that is part of the reason it is cheap.  Cinedigm is an example.  Howard Marks has heavily influenced the way I look at securities - the way outperform is to hold non-consensus view and be correct.  I can find the non-consensus securities but the correct part does not always work out (NTL and Delta Financial) and the earlier you can see it the better - Lodgenet was one where I left before the ship went down when the firms recovery did not happen and EBITDA went down.  Levine (author of How to Make Money With Junk Bonds) has stated and provides an example of the EBITDA trend being more important the the EBITDA coverage for high yield investing.  The concentration piece is a more recent focus - from both ERICOPOLY, Fairholme, Buffet and a guy a knew about 20 years ago who retired on DELL computer.  He focused on one stock and his son was the firms ad agency so he was able to do well with only one stock. 

 

Packer

 

Thank you, Packer!

In this we actually differ… I don’t pay much attention to the consensus view or to Mr. Marks, when he says there is a bargain price for every asset… vice versa, I want to own only businesses that I reckon good businesses, led by capable and trustworthy people. In other words, I wouldn’t have invested in a textile business in the 1960s or in a newspaper in the 2000s (many other examples are, of course, available), nor I would partner with idiots or villains (with the glaring exception of Mr. Biglari, of course!! ;D), no matter the price that is offered to me.

This might be a serious limitation of mine.

 

giofranchi

[twacowfca]

Even more focused would be a good business with a straight shooting owner that had most of his wealth in the business and a long record of superior returns with the prospect that those returns will continue  indefinitely. Then, all that's needed is a good entry point and willingness to let the compounding begin. That's the surest way to make money, but not the only way. 

 

twacowfca,

you already know that by “first class management” I meant exactly what you have written! ;)

 

There are occasionally decent businesses under stress that are likely to be survivors and can be had at a fire sale price : think BAC.  One offs like BRK with a free quasi put at a strike price equal to the market price or BP when all the scientists were saying that their third  attempted method to cap their well was almost certain to succeed in a couple of days as they had detected that they were only were only a few feet away from it.

 

At such times, putting a huge chunk of assets into such opportunities as many on the board have done isn't as risky as Mr. Market thinks it is.

 

That is much harder for me to do… Though I understand its merit!

It is just that I spend my whole life thinking about business. What works, and what doesn’t. Guess simply not much time left to become shrewd and confident enough to grab opportunities like BAC and BP…

Who knows? Maybe after some time spent on this board… :)

 

giofranchi

 

Yes. Simple in concept, but not always easy to jump on a bucking bronco at the right time.  I completely missed BP because I was wrapped up in something else that was more complicated that took longer to work out with less profit.

 

I bought BAC one day off the bottom, but through flukey circumstances it turned out to be a small position instead of a large one.

[buylowersellhigh]

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.

 

Uccmal,

Would love to hear your thoughts on Extendicare. Just came on my radar.

 

BLSH

[giofranchi]

giofranchi,

 

that is interesting, i usually tend to think "everything has its price" it could the ugliest dog in the world but at a certain price i'll take a look at it. its all about the delta btw value and price.

 

see you are more focus on the absolute value not the relative.

 

just my humble opinion.

 

hy

 

 

I think one of the keys is to find a strategy/volatility level you are comfortable with.  It is not worth getting high returns if it ruins your life due to stress.  I would think that most would not like the type of volatility I have experienced (down over 50%) in 2008.  I try to find value stocks which upon first inspection folks say: yikes!.  Very uncomfortable stocks to own - that is part of the reason it is cheap.  Cinedigm is an example.  Howard Marks has heavily influenced the way I look at securities - the way outperform is to hold non-consensus view and be correct.  I can find the non-consensus securities but the correct part does not always work out (NTL and Delta Financial) and the earlier you can see it the better - Lodgenet was one where I left before the ship went down when the firms recovery did not happen and EBITDA went down.  Levine (author of How to Make Money With Junk Bonds) has stated and provides an example of the EBITDA trend being more important the the EBITDA coverage for high yield investing.  The concentration piece is a more recent focus - from both ERICOPOLY, Fairholme, Buffet and a guy a knew about 20 years ago who retired on DELL computer.  He focused on one stock and his son was the firms ad agency so he was able to do well with only one stock. 

 

Packer

 

Thank you, Packer!

In this we actually differ… I don’t pay much attention to the consensus view or to Mr. Marks, when he says there is a bargain price for every asset… vice versa, I want to own only businesses that I reckon good businesses, led by capable and trustworthy people. In other words, I wouldn’t have invested in a textile business in the 1960s or in a newspaper in the 2000s (many other examples are, of course, available), nor I would partner with idiots or villains (with the glaring exception of Mr. Biglari, of course!! ;D), no matter the price that is offered to me.

This might be a serious limitation of mine.

 

giofranchi

 

I am not sure I would put it that way... Instead, I think I know when my reasoning will be correct and when, instead, I am bound to make mistakes.

The thing I like the best is thinking about business... After many years, I think I know when I see a good business, and when I see a good and trustworthy manager. This is the situation in which my thinking and behavior will be correct, the situation in which I know I will be able to exploit Mr. Market's errors.

For instance, LRE's share price continues trending down. And I will keep buying more. No problem to do that, I am perfectly confident. Vice versa, with something like BAC or BP I know I will make mistakes. I cannot have conviction with something like BAC of BP, and without conviction I won't think clearly.

In other words, let's say that I think I cannot always outsmart Mr. Market, and I try to stay in that sweet spot where I think I enjoy an advantage over it. Whenever I have tried to stray outside that circle, I have suffered bad consequences...

 

giofranchi

[SharperDingaan]

We're seldom in more than 4 equities at a time, we're often leveraged, & on a straight compounding basis we've done >20%/yr over the last 5 years. However, during those 5 years we were also down 50%+, & up 140% at various times; so volatility matters!

 

For us it is one equity per industry, only industries where we have competency, & we buy only when that industry is experiencing issues. By default, it means that our position, & our risk, is at its largest when we initially purchase using margin; thereafter the entire focus becomes one of reducing the risk associated with that position. The downside is that a portfolio of sizeable, zero-cost, dividend paying (infinite yield), stub positions is very difficult to manage.

 

We are also a 100% equity portfolio, & pay out roughly 60% of the closing value every 4-5 years or so. The $ buy out mortgages, fund new ventures, finance education, RRSP catch-ups, long trips, etc. We find that if you do not systematically take $ off the table there is no point to investing; money is the servant, not the master. We do not get paid a fee on AUM (agency bias), & if the portfolio went to zero tomorrow, it wouldn't bother us.

 

All told we're fairly sure that the restrained size, focus on risk reduction, & periodic capital withdrawals is allowing us to outperform the market - would it do as well over the long term in a bull market, is an open question. If we were not periodically withdrawing capital our compound return would also be a lot higher.

 

SD

 

[hyten1]

giofranchi,

 

you refer to good biz, i think that is the difference, for others  (i don't want to put words in other peopls mouth), at least for me i look at it as opportunities.

 

as long as the delta btw price vs value is wide (how wide depends on the opportunity/situation) i will take a look and initiate a position.

 

i think maybe one day if i get to the point where i have enough capital and don't want to be so involve with investing, i'll look for the BEST companies at a reasonable price and just park my money. I believe since my capital is relatively small, if i am going to actively manage it i'll look for the best delta in price vs value that i can find (of course within my circle of competency etc etc.).

 

but i do have to say and repeat what eric said before. I don't care where i get the idea from, i am very happy and willing to copy others ideas and make money off it. actually most of my investment are from others, only very few was more my original ideas.

 

EDIT: Also the funny thing is i suck at research, i usually like to read others research, work, etc. i'll decide base on what i read from others :) sad but true. i am shameless, i am not great at research, but i think i am better at compiling the info and decide if its a good idea or not base on what others have painstaking dug up.

 

jmho, i could be wrong on all this stuff.

 

hy

 

[locatevalue]

Good points.  Although spring 2009 presented a great opportunity to buy a diversified basket of the very best companies on earth.  My other oversight was not just holding them or converting the options to stock at the time.  I bought sbux below 10, axp below 20, ge below 10, and hd around 20. 

 

Would I have done better keeping those than with BAc in the last year and a half.  Might have been a wash.  Lesson learned.  My plan is to keep BAC, WFC, JPM, AIG, and SSW until they are clearly over valued this time.  However, we know that God laughs at plans...

 

 

I agree spring of 2009 was very different and i think its once in a lifetime opportunity. I did spread out my bets on 7 to 8 during that time. Unfortunately by end of 2008 all my cash was already in market and suffering and the only income i can add was my salary which i kind of funneled everything into market the day it was deposited, It was plain luck that market didn't get any worse otherwise i would have suffered.

I am expecting opportunities more in the lines of end of 2011 which is quite possible like some sector getting extremely cheap or good quality business mispriced and in which case i would like to swing hard. Till then playing with buckets of 3 to 4% in this market and keeping some cash.

[CorpRaider]

Did someone use excellent management and BAC in the same paragraph?  Have you ever heard Ken Lewis or Brian Moynihan speak? hah!  Just kidding...kind of

[augustabound]

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

 

 

What made you choose those 2 rather than some of the other beaten down stocks around that time?

 

These were the two I felt I knew the best.

 

There's a story, of course.....and it's etched in our family lore.

 

Sunday March 8(?), 2009, the wife and I are at a car wash and I say, "look, I won't do this if you say no,

but Wells Fargo and AXP are down to $10 and they are worth probably 3X that amount. The market  thinks they are going under. I don't. I want to put 1/3 into each."

 

She shocked me with an immediate "yes."

 

So I was prepared to make the trade Monday morning....I didn't sleep well, and woke up at 3 AM. Absent-mindedly I turned on CNBC, and bam, there was Buffett. And he basically endorsed them both, you know, the way he tells you without actually saying 'buy the stock.' One thing he noted was their $40BB pre tax pre-provision income and how the company was selling for like 3 X that.

 

Every once in a while we go back to that car wash and reminisce  ;D

 

P.S. Some one rudely pointed out later that if you just bought an index of small-cap stocks at that same time, you would have made even more.

 

Some fathers can take their kids to the spot they proposed to their wife and you have the spot you decided on AXP and WFC.  ;D

 

Then you can say Buffett came to you during a sleepless night to reinforce the decision.

[merkhet]

 

Did someone use excellent management and BAC in the same paragraph?  Have you ever heard Ken Lewis or Brian Moynihan speak? hah!  Just kidding...kind of

 

 

I think Brian Moynihan is an excellent manager. Eloquence and competence are different.

[no_free_lunch]

I wouldn't mind doing some more analysis on concentration effects.  To do so you need data.  Does anyone know where you can get real-world trading records?  Preferably from a guru but I am open to suggestions.

[twacowfca]

I wouldn't mind doing some more analysis on concentration effects.  To do so you need data.  Does anyone know where you can get real-world trading records?  Preferably from a guru but I am open to suggestions.

 

 

There was a study a few years ago that showed when fund managers built up a position in a stock that was a large amount of that stock's market cap, the stock outperformed by something on average about 6% better than the market.

[Packer16]

What you could do is for example get the quarterly reports for FPA Capital and buy the top 5 holdings after the report are released (45 days after the Q) then replace any of the top 5 with the new top 5 every Q.  You can also do this any other good value manager (like Buffett, Fairholme, Longleaf, etc.).  It would be interesting to see in FPA's case how much slippage there would be due to the delayed timing and how much value add would occur with other value funds.

 

Packer

[Uccmal]

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.

 

Uccmal,

Would love to hear your thoughts on Extendicare. Just came on my radar.

 

BLSH

 

See this:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/exetf-extendicare/msg126483/#msg126483

[CorpRaider]

One other little data point, seems like Greenblatt's shop has put up better numbers in the managed accounts following the magic formula (at least per their website) which focus on the top 40, versus the FNSAX which focuses on the top ~140 which has outperformed the FVVAX, which focuses on the "top" 1000 or just tweaks the weights in the index depending on how you look at it.  The records are all probably too short to draw any meaningful inference but something to stick a pin in on this question, it seems to me.

[Valuebo]

What you could do is for example get the quarterly reports for FPA Capital and buy the top 5 holdings after the report are released (45 days after the Q) then replace any of the top 5 with the new top 5 every Q.  You can also do this any other good value manager (like Buffett, Fairholme, Longleaf, etc.).  It would be interesting to see in FPA's case how much slippage there would be due to the delayed timing and how much value add would occur with other value funds.

 

Packer

 

Ha, interesting. I have been thinking about something like this.

Why not make it more interesting:

- 3 - 5 top managers picked, from each 3 - 5 biggest positions;

- leaps or other means of leverage where possible but no margin;

- maybe weighted according to what the position did between the point the position was bought and the release of the report;

- weighted according to other factors like position size in the portfolio of that manager, the times a certain position got picked, ...;

- rules to roll over leaps to later expiration dates;

- Maybe some cash to average down under strict rules etc.

 

I would really be interested to see what such a portfolio of say 15 leveraged positions would do. Would it get killed sooner or later?

[Packer16]

I tested somthing like this with Buffet's portfolio and it did not work put too well as the premiums paid for the calls ate up most of the portfolio over time.  I like the idea of just buying the stocks though.

 

Packer

[Valuebo]

That probably shouldn't be surprising. Maybe there's a way to price this in your calculations for position sizing but I wouldn't know how directly... Thanks for your quick reply. ;) The idea of vanilla stocks is likely interesting enough tho. Thanks again, food for thought.

[Packer16]

Examining the top 5 holding of value investors over time would be an interesting exercise.  Given the large amount of spreadheet and data feed talent here, is there an easy way to do this if we can identify the holding from old quarterly reports of there managers?  If so, maybe we can each take a few and see what results we get.  TIA.

 

Packer

[NormR]

Isn't such a study going to be plagued by survivourship bias. 

[Packer16]

It may be but if we get a large enough sample and compare to the NAV return I think we can test whether if someone was to invest in a concentrated value portfolio they would do better than a more diversified portfolio.  We have observed that in a few cases it will work but if we do a MF test I think we may be able to be more confident that the excess return is from concentration and not other factors.

 

Packer

[no_free_lunch]

I think best bet is to just script it.  Then you can get a much larger sample.

[hyten1]

i think survivourship bias is a very important point.

 

- i tend to think the level of expertise/experience needed for a very diversified portfolio is lower (more people can do this and achieve average results)

- i tend to think on a percentage basis vs the diversified portfolio more portfolio blow up in the concentrated portfolio.

 

no sure how to take this into account.

 

i guess what we are really looking for is, for a investor that is experience/knowledgeable which portfolio setup would do better diversified vs none. (has this already been stated?)

 

wouldn't it be easier just to look a the top managers break them up into diversified vs concentrated and see which group has a better performance long term? i guess even this is not easy to do :)

 

hy