Bob Rodriguez 25 years experiment on Concentration

[goldfinger]

Haven't countries already had election with these fridge parties (Greece, etc)?  Interestingly enough I don't know how different the right from the left is in some of the countries.  Take France, Hollande won and spoke a good game but how many of his "socialist" policies has he been able to implement?  He raised taxes on the rich but he has had to deal with economic limits of the welfare states and has not talked about nationalization.  I will be concerned when I hear of nationalization.  It appears the only difference is taxes and the social issues. 

 

Packer you saw it clearly. It is very difficult to govern and change anything in France, and it has been like this for a long long time. Most political discussions are complete hot air there from one ideology to the next. The French seeing the current crisis got scared of loosing their entitlement programs and then voted for the left but not even them believe in it! It is kind of a desperate situation politically but if the economy goes under (and it is looking like it is really possible - the markets have maintained rates low for now as they fled the southern states bonds, but how long will it take until they realize their mistake?) things could go rapidly into unrest and brutal change as many people do not know what to do anymore and are growing scared.

[twacowfca]

Haven't countries already had election with these fridge parties (Greece, etc)?  Interestingly enough I don't know how different the right from the left is in some of the countries.  Take France, Hollande won and spoke a good game but how many of his "socialist" policies has he been able to implement?  He raised taxes on the rich but he has had to deal with economic limits of the welfare states and has not talked about nationalization.  I will be concerned when I hear of nationalization.  It appears the only difference is taxes and the social issues. 

 

Packer

 

Yup. And the leaders of the two dominant French parties are elitists who generally graduated from the same top schools.  Kind of like Bush and Kerry who went to the same IV League school and even belonged to the same elite, secret society.  Do we live in democracy or only in the semblance of one?

[goldfinger]

Yup. And the leaders of the two dominant French parties are elitists who generally graduated from the same top schools.  Kind of like Bush and Kerry who went to the same IV League school and even belonged to the same elite, secret society.  Do we live in democracy or only in the semblance of one?

 

Sarkozy however was a lawyer and therefore not part of that elite you are talking about.

[twacowfca]

Yup. And the leaders of the two dominant French parties are elitists who generally graduated from the same top schools.  Kind of like Bush and Kerry who went to the same IV League school and even belonged to the same elite, secret society.  Do we live in democracy or only in the semblance of one?

 

Sarkozy however was a lawyer and therefore not part of that elite you are talking about.

 

Isn't there an elite apprenticeship program in France whereby the most meretricious students after a series of exams become the interns of the current French leaders and then wind up years later as the new leaders of both of the dominant French parties?

[goldfinger]

Isn't there an elite apprenticeship program in France whereby the most meretricious students after a series of exams become the interns of the current French leaders and then wind up years later as the new leaders of both of the dominant French parties?

 

Yes. There are a few schools that lead to a few elite programs where many leaders of government and industry are recruited from. But it just happened that Sarkozy did not study there and was a lawyer by training. Mitterrand also by the way (arguably the most influential president since de Gaulle who himself was not part of that elite!). All this meaning that it is true to a certain extent to say the least.

[giofranchi]

I think the banks had a liquidity issue not a solvency one, which is what happened in the 1930s and in Japan.  Even Freddie and Fannie appear to have had on a liquidity issue as they are going to pay back the gov't with interest.  In Japan, the solvency issue was dragged out over 10-years thus part of the reason for the stagnation.  I think a key in Europe is how they handle the solvency issues they have in Southern Europe (either through a devaluation via a S-Euro or restructure).  The Swedish reference is in Irving Fisher's paper written in the 1930s on Deflations.

 

Packer

 

Packer,

are you telling me that you really know how the situation of Japanese banks was in the 1990s? How do you know if banks have or do not have a solvency issue? When any solvency issue might be hidden by liquidity for years?! Furthermore, are you telling me that you know how the true situation of Sweden was, just because you have read Mr. Fisher’s paper? Btw, as much as I respect Mr. Fisher’s work, I also have read that paper and I am sure I don’t know anything about Sweden’s situation way back then!

The problem with macro is that it is so imprecise… It is really more stories than facts… Not because facts are not there… But because we have the nasty tendency to generalize… Instead, little changes in premises might very often mean big changes in outcomes… we seldom truly have all the facts that matter, therefore we seldom come to the right conclusions.

To get an economic system like Japan, Europe and even the US so much into debt, you must have done basically two things:

1) To squander resources: a serious misallocation of capital.

2) To live beyond our means for many years.

They both are mistakes that have already been committed. I believe we are not necessarily bound to repeat them again and again. I believe we could learn from our mistakes and improve our behavior. I don’t believe though that, once we have erred again, we might be spared from living with the consequences of our misbehavior.

Until definitely proven wrong of course! And I sincerely hope I will be proven wrong! Yet, as I have said, imo it is still too early…

I like to keep it as simple as that.

 

giofranchi

 

[giofranchi]

giofranchi -- Tongue in cheek but I understand that Italy has been in decline for nearly 2000 years but I have a belief that Italians are doing just fine these days irrespective of what the press or macro economists are saying :)

 

For all who think there is no problem in Europe, I simply invite you to come to Italy, have a nice trip for a few weeks, so that you can relax and visit wonderful places. Then, when finally recharged and with your full strengths completely restored… TRY TO DO SOME BUSINESS!! GOOD LUCK!! ;D ;D

 

giofranchi

 

[oddballstocks]

giofranchi -- Tongue in cheek but I understand that Italy has been in decline for nearly 2000 years but I have a belief that Italians are doing just fine these days irrespective of what the press or macro economists are saying :)

 

For all who think there is no problem in Europe, I simply invite you to come to Italy, have a nice trip for a few weeks, so that you can relax and visit wonderful places. Then, when finally recharged and with your full strengths completely restored… TRY TO DO SOME BUSINESS!! GOOD LUCK!! ;D ;D

 

giofranchi

 

I had an Italian who worked for me on a project last year.  He ran a tech company in Italy, he left and came to the US because he was tired of the stress and hassle of just trying to operate.  Some of the stories he told made me question how anything actually happens in Italy.

 

He is from Southern Italy, which I gather is a place all to itself in terms of being business unfriendly.  When I worked with him I held an Italian investment, which after talking to him at length I sold, the company was run by the mob.  I ran some other ideas past him, and after getting more on the ground intel decided that Italian investing isn't for me, I'll let those bargains go to someone else..

[giofranchi]

I ran some other ideas past him, and after getting more on the ground intel decided that Italian investing isn't for me, I'll let those bargains go to someone else..

 

Not me!!  ;)

 

giofranchi

[Guest longinvestor]

giofranchi -- Tongue in cheek but I understand that Italy has been in decline for nearly 2000 years but I have a belief that Italians are doing just fine these days irrespective of what the press or macro economists are saying :)

 

For all who think there is no problem in Europe, I simply invite you to come to Italy, have a nice trip for a few weeks, so that you can relax and visit wonderful places. Then, when finally recharged and with your full strengths completely restored… TRY TO DO SOME BUSINESS!! GOOD LUCK!! ;D ;D

 

giofranchi

 

I had an Italian who worked for me on a project last year.  He ran a tech company in Italy, he left and came to the US because he was tired of the stress and hassle of just trying to operate.  Some of the stories he told made me question how anything actually happens in Italy.

 

He is from Southern Italy, which I gather is a place all to itself in terms of being business unfriendly.  When I worked with him I held an Italian investment, which after talking to him at length I sold, the company was run by the mob.  I ran some other ideas past him, and after getting more on the ground intel decided that Italian investing isn't for me, I'll let those bargains go to someone else..

 

Charlie Munger was in his element, unusually talkative, at the AGM this year. He had Warren squirming as he picked out one country after another to insult as capital allocation disasters. I remember Italy, Greece come up more than once. Warren tried to put a gag on him but that did not work at all ;D

[Packer16]

What I do know about Japan is the debt situation lasted longer (and still may be going on) due to extend and pretend.  The extension happened but the asset value never recovered.  In the US, in most cases, banks and the regulators force the banks to incur losses and debtors are set free (funny similar to the Jewish concept of Jubilee).  Just look at the number of bank failures in the US vs Japan and Japan went through a much worse cycle than the US did.  What makes me optimistic on the US versus Japan and other places is the mechanism of dealing with debts.  In the US you have Chapter 11, where the debt is gone and folks are free to begin again.  In much of the rest of the world, you have either a liquidation upon bankruptcy or extend and pretend.  That is why I think the US/Canada is different when it comes to debt.  Just look at individual mortgage debt.  In many places in the US it is non-recourse.  This allows the debtor to move on and not be burdened with debt for the rest of his life.  My understanding in Europe this is not the case.  I can see how a system based upon on non-recourse debt can have a huge advantage over one that does not.

 

Packer

[twacowfca]

What I do know about Japan is the debt situation lasted longer (and still may be going on) due to extend and pretend.  The extension happened but the asset value never recovered.  In the US, in most cases, banks and the regulators force the banks to incur losses and debtors are set free (funny similar to the Jewish concept of Jubilee).  Just look at the number of bank failures in the US vs Japan and Japan went through a much worse cycle than the US did.  What makes me optimistic on the US versus Japan and other places is the mechanism of dealing with debts.  In the US you have Chapter 11, where the debt is gone and folks are free to begin again.  In much of the rest of the world, you have either a liquidation upon bankruptcy or extend and pretend.  That is why I think the US/Canada is different when it comes to debt.  Just look at individual mortgage debt.  In many places in the US it is non-recourse.  This allows the debtor to move on and not be burdened with debt for the rest of his life.  My understanding in Europe this is not the case.  I can see how a system based upon on non-recourse debt can have a huge advantage over one that does not.

 

Packer

 

You're right. That's a huge advantage for the US/Canada.  Commercial bankruptcies that allow fresh starts are equally important.  There are lots of zombie companies that are on life support after a downturn in Europe and Asia.

[Kiltacular]

You're right. That's a huge advantage for the US/Canada.

 

I agree with twacowfca's agreement with Packer on this idea, in a big way.

 

It is easy to see the flaws with the idea of letting people walk away from debts.  It is not easy to see the (likely massive) benefits of letting people walk away.

 

In fact, as in Packer's example, the benefits (of the British system) are most clear only when compared to those that do it another way.  I don't necessarily think it would be easy to predict it would work the way it does.

 

Sometimes "saving face" costs everyone.

 

It reminds me of this treatise: http://www.econlib.org/library/Bastiat/basEss1.html#Chapter 1

 

 

[goldfinger]

In the US you have Chapter 11, where the debt is gone and folks are free to begin again.  In much of the rest of the world, you have either a liquidation upon bankruptcy or extend and pretend.  That is why I think the US/Canada is different when it comes to debt.  Just look at individual mortgage debt.  In many places in the US it is non-recourse.  This allows the debtor to move on and not be burdened with debt for the rest of his life.  My understanding in Europe this is not the case.  I can see how a system based upon on non-recourse debt can have a huge advantage over one that does not.

 

I would tend to agree with that too. I would add that you do not really have the right to fail in Europe (at least in the countries I know well) and the way to deal with debt is only one part of the equation.

 

[giofranchi]

What I do know about Japan is the debt situation lasted longer (and still may be going on) due to extend and pretend.  The extension happened but the asset value never recovered.  In the US, in most cases, banks and the regulators force the banks to incur losses and debtors are set free (funny similar to the Jewish concept of Jubilee).  Just look at the number of bank failures in the US vs Japan and Japan went through a much worse cycle than the US did.  What makes me optimistic on the US versus Japan and other places is the mechanism of dealing with debts.  In the US you have Chapter 11, where the debt is gone and folks are free to begin again.  In much of the rest of the world, you have either a liquidation upon bankruptcy or extend and pretend.  That is why I think the US/Canada is different when it comes to debt.  Just look at individual mortgage debt.  In many places in the US it is non-recourse.  This allows the debtor to move on and not be burdened with debt for the rest of his life.  My understanding in Europe this is not the case.  I can see how a system based upon on non-recourse debt can have a huge advantage over one that does not.

 

Packer

 

Packer,

with this I agree 100%, and long-term I am very bullish about US/Canada. Actually, with the only exception of LRE, all my investments are in US/Canada! :)

Anyway, as much as Chapter 11 might be a very useful thing and a huge advantage, I still have a very hard time trying to reconcile it with buoyant stock market valuations… As you can see in the graphs I have just posted on the Macro thread, stock market valuations right now are very rich and optimistic, if compared to what happened in the past… I know your view is the future will turn out to be much better for business than the last 100 years or so… And therefore higher stock market valuations are justified… Yet, sincerely, I don’t know… As long as Chapter 11 might be too frequently “called upon” and market valuations remain elevated by historical standards, I prefer to keep behaving conservatively.

 

giofranchi

 

[Packer16]

Another way to look at Chapter 11 is the transfer of assets from poor capital allocators (who stay in charge in other systems) to better capital allocators.  This can lead to a more efficient private sector if the government does not get in its way or is not large enough to crowd out the re-allocation process.

 

Packer

[twacowfca]

Another way to look at Chapter 11 is the transfer of assets from poor capital allocators (who stay in charge in other systems) to better capital allocators.  This can lead to a more efficient private sector if the government does not get in its way or is not large enough to crowd out the re-allocation process.

 

Packer

 

Lets go in the other direction.  The limited liability corporation was the big change in economics that led to productive use of assets in capitalism.  That was much better than mercantilism when  sovereign states acquired surplus assets generated through trade and directed their use for nonproductive activities such as wars. 

 

The creative destruction of capitalism is dynamic.  Surplus capital is directed to productive limited liability enterprises that have prospects of good returns as capital is pulled away from businesses with poor returns.  The ability to throw off quickly the chains of debt that can't be repaid and reallocate the remaining capital is a very important wheel in the mechanism.

[cogitator99]

but the majority of your banks were failing firms! They were just rescued by taxpayers money!

 

Wasn't that more of a liquidity thing than a "failing because your assets are worthless and you have no long-term earning potential anymore" situation, though? I think the government made money on most of the bailout and got out of most things it injected capital into. That's different from nationalizing institutions that have no real profitable business and leaving the taxpayer money into them to be destroyed over time...

 

That's my understanding, anyway. Saying "they were failing" hides that fact that there are many ways to fail, some less recoverable than others (f.ex. The difference between John Malone getting a margin call because he was over-stretched - bad but if he can get through he still owns good productive assets - and someone else running a business into the ground because the fundamentals are terrible and that can't easily be fixed, so that even if you save them, it's just temporary and they'll keep destroying value).

 

I think that's a good point.

 

Just adding another point on why I too think its a stretch to think that the US will end up like Japan. My general observation is that the US system itself is more resilient than is otherwise believed elsewhere around the world. I remember during the GFC how smug some people were...let's say the Chinese...about how their model was demonstrably superior than that of the US. Kind of similar to how Japan related to the US in the 1970s-1980s. (We all know how that worked out.)

[gary17]

I've only started investing since 2008 so take my experience with a grain of salt.  But I am definitely finding that it makes more sense to concentrate than diversify as the latter would probably produce market or non-market beating results.  If I am only going to get market return then why waste the energy learning about investing when I could just be a saver and keep buying SPY?

 

Maybe a bit of introduction of where I came from:

 

I started investing in 2008; I believe I made money in 2008 / 9 - only because I just got my first bonus from work in Jan 2009 - I think any one who bought anything in late 08 early 09 made money - that was pure luck for me.

 

In 2010 - 2011 I was just mostly experimenting, starting to learn about Buffett and other value investors, but mostly Buffett.  I believe I bought KIMCO realty, NPK, POSCO, Century Tel, WFC, BCS, IRE, COH,  etc - bunch of stuff that would later turn out to be very good picks if I had just left the basket there and let the market does its magic. 

 

By mid 2011 I decided to concentrate my stock holdings into not more than 5 after reading or watching one of Buffett's interview about how we should only have 20 stock selections in a lifetime and each one of those has got to be those that you could buy today, go away for a 20 years, and you still have a very high degree of confidence that the business will be there and still generate income. 

 

With that in mind and using some google finance screens I got started with a concentrated position in Wright Express - that's when I made my first pile of money.  I then moved that to Allied World Assurance (AWH) - which was about 60% or so of my holding.  I bought a lot when the shares dropped through this whole acquisition they were trying to make with Transatlantic...  thinking that the CEO was buying something Buffett wanted to buy (smart?), it was below book (i think all financials were), and the insurance sector overall was in a soft market.  I looked at that and thought the risk was pretty low.  Got lucky again and made some money there.

 

I also bought quite a bit of Bank of Ireland - after hearing Prem was buying - but more importantly, there was a significant discount between the london shares (BKIR.L) and the ADR shares (IRE) - I bought more when the price dropped 15% below Prem's published purchase price of 0.1euro/share.

 

In mid 2012 I then put the winnings into RIMM when it was around 10dollar, and started buying more when it hit $8 - my thesis then was with no debt it couldn't go to zero (yet) and there's enough stuff down the pipeline and user that I just couldn't see the company going away.  I was also attached to a company from Waterloo as that's where I went to graduate school and my girlfriend had also lost a lot of money buying RIMM at $50 -  I was told when everybody else is screaming at the loss, I thought that was the point of maximum pessimism and so I stepped in, and said good bye to AWH shares. 

 

All said from mid 2011 until end of June 2013 I was up about 260%  ;D    and that's when overconfidence caught up with me.

 

As RIMM's BB10 phones begin to sell, shares started to drop , and I held on to them and on occasions bought more...  I think I ended up with about 80% of my portfolio in RIMM, no cash, and 20% in Bank of Ireland.    I was so glad I spoke to my dad about this a few weeks before the latest earning came out, and he talked me into selling some -  and then when RIMM's Q2 came out it i lost about 45% of my wealth (I leveraged!) - would have been more had I not listened!.  I'm still up about 170% from mid-2011 when i started concentrating.  That's about 30% annualized for the last 2 years

 

I think what I am learning though is that concentrating definitely works because you have the benefit of knowing a lot about the business.  When I owned RIMM heavily earlier this year, I was writing to the management, traveling to meet up with their sales team, got connection to find out production levels from RIMM's contract manufacturers, exchanged emails with many analysts, the board, and following blog posts, etc. 

 

I think concentration forced me into the exercise of getting to know the company well, like as well as the analysts covering them and probably even more - which at times felt like a full time job.  But at the same time created the danger of becoming too attached to the investment. 

 

And what's worse is after losing the 45%, my psychology took a toll - more than the fact I've made good picks before.  This will probably hamper my performance going forward as I will always be thinking about the potential of significant wealth destruction.

 

I've now slowly cashed out of my RIMM as it has risen recently on buyout rumours - still probably hold too much, but I can't really find what else to buy -  many on this board will disagree, but since I got in at about $9 cost basis - I see holding RIMM today as minimal risk while I think about the next move. 

 

Thanks to many on this board I picked up ALSK and OIBR, but I am still sitting at about 25% cash not knowing what to do.  I've done nothing but reading since July 1st  and still can't find what to concentrate on next, although I am now more open to the idea of either FFH or LRE.L only because I don't know what else to do, but have the confidence in the men running the companies, which I think is not the best reason for investing in something. 

 

This is a really long post!

 

Gary

 

 

 

[ASTA]

garychen17 Thanks for sharing your experience so far. I just have one question if you look back to your investing so far how much lower would your returns have been without leverage. Including the way up and down until today. Why I am asking is because maybe one should be less willing to leverage and only do if there is a paramount belief that one is right the proverbial 1 punch card out of 20. I think it would be a interesting self assessment :D of course I don't leverage much because I have no recurring cash flow so I have to be careful as I only have one shoot. 

[Uccmal]

Thanks Gary, I too took a ride in the Rim... down.  One of the worst all time investments for me. 

 

I am not one to give advice preferring to share experience.  You have 25% cash, and what sounds like a decent job.  Why not institute the most successful Buffett skill and try patience.  There will be a significant correction at some point, probably sooner rather than later.

 

Like me, you sound like you have no trouble pulling the trigger, when the time comes.  My long term returns will be just fine If I can keep myself from making mistakes by confusing value for creative destruction via the Rims, Resolute FP, and Fibreks of the world. 

 

Right now I am net cash, 5%, for the first time in 16 years of investing.  Its not that anything is obscenely over valued, its just that there is nothing really compelling.  I tend to stick to businesses where I see a longer term, somewhat predicable future and avoid Graham/Schloss/Watsa situations these days.  The G/S/W style doesn't work well for me.

[SharperDingaan]

Welcome to the board.

 

Overconfidence/leverage. Nothing wrong with either of these. Assuming 50% leverage, the secret sauce is that you pay the leverage off as soon as you have a double;  the sale of 1/2 your position counters the overconfidence, & severely reduces your loss exposure to the growing cockiness.

 

Casino economics. You cash-in $100, play for a while, & cash-out with $10 (taxi fare home); the $90 was entertainment. The experienced know not to be greedy - & to cash out at around $120; the entertainment becomes free, the taxi fare is covered, & they get to take $10 home for their time. Casino, or stock market - systematically withdraw capital as you play.

 

RIM. We also punted @ $10, but made money. Only 10%, & we left a lot on the table (at least another 10%), but we cashed out of the casino UP. Could have stayed & had a wild ride, but we would have cashed out of the casino DOWN today. Investing should not be entertainment; if you feel the need,  buy a theatre ticket - its a lot cheaper!

 

Took us many years to realize ....

 

SD

[LC]

Thanks for the words, SD. I am still working on learning how to turn off my emotions. Sometimes I'll check my portfolio, see all green or all red, and it's a trigger: I forget about the business, I forget about Mr. Market, it just becomes a game of are the little pieces of paper going to go up or down? I'm getting better at realizing when I start letting my emotions get the best of me...I just log off and turn my attention elsewhere.

[gary17]

Thank you all for sharing your thoughts.  I've been learning a lot from this board  :)

 

On leveraging - performance would have been worse if I did not leverage.  Looking back though, I still think I would make the call again to leverage: money was dirt cheap  (still is), I have a job, the crash of 09 was a rare event and there's still plenty of doubt in the market, and more significantly I was 29 with no dependent - all the factors I've considered in my thought process pointed to leverage and concentrate on what I (think) I know will perform the best. 

 

I work as a risk engineer in Vancouver, BC. That's all I do all day at work - assessing risk, looking at event trees and performing hazard analysis.  I think a lot of the methods we use in engineering may apply to investing -

 

If I may elaborate a bit more, this might be a bit off topic, but I think related - in my practice, certain events such as fire or explosion is so rare and the outcome is so unpredictable that there's really no past data to backup what is the maximum hazard.  To address this, we can use a group of experts approach where "experts" can make informed 'guesses' on what the risks are and how to deal with them.  The problem with a group of experts in a meeting room is the same as too many chefs in the kitchen - everyone's got an opinion and some with stronger personality may dominate while significant risks from those that are less vocal may be missed. 

 

To take out the subjectiveness in the discussion process, there is a process known as the Dalphi technique (there are variants of this too) that aims to minimize the personality factor in the decision-making process.  For example, if a group of experts identify scenarios A, B, C and D as the likely outcomes, they vote on them... narrow down to A, B, C, and vote on them again until they agree with some form of preset criteria.  All the time the voting is done is secret - so no one knows who voted what.  And through iteration, a consensus can be reached. 

 

How does this relate to investing?

 

A while ago I was quite intrigued to see the Corner Berkshire Fairfax Fund poll - I think we ended up about 10 or so stocks.  It'd be interesting to do another poll now that everyone knows the result, and see if the 2nd poll result differs - and if this process is done two or three times, theoretically we can narrow down the selection to 4 or 5 dominant ones.  If the methods in engineering applies at all here, these 4 or 5 concentrated holdings should outperform the initial poll.   

 

I see quite a bit of parallel between financial decision making and that of engineering decision making for risk avoidance purposes - both dealing with unknown outcomes beyond our control while there are 'experts' who have experience from the past that should be able to pick out a path that provides a favorable outcome. 

 

Gary

[SharperDingaan]

Many years ago I started off as a Petroleum Engineer, & spent my first 2 summers in the North opening up the Beaufort sea. As with most of my engineering year, I transferred to business when the bottom dropped out of the o/g market. Things had become so bad that Calgarians had began to use the depression era laws, to avoid bankruptcy - by selling their houses to each other for $1.

 

Risk assessment is very similar, except that consensus techniques result in an almost 100% error rate. 'Over-engineering' concepts are seldom applied, except in long tail insurance; & even then - only if folks with some actuarial knowledge (loss triangles) are part of the discussion. I would direct you to the FFH & Lancashire discussion threads.

 

SD