Author Topic: Portfolio Concentration  (Read 6131 times)

scorpioncapital

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Re: Portfolio Concentration
« Reply #10 on: December 22, 2017, 06:45:35 AM »
The only reason to own #1 - all net worth in small business is because you think you are going to earn 1000% or 10,000% on a small base over a medium period of time. Since that isn't possible with #2, the question really is do you have any capital to start with or you're looking to create capital out of thin air.


Viking

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Re: Portfolio Concentration
« Reply #11 on: December 22, 2017, 09:37:19 AM »
Thanks to everyone who have shared their thoughts... great to get lots of different perspectives.

My experience is every couple of years I will get an opportunity that, from my perspective, is very high probability (80%) of going up 50-100% in a couple of years. These ideas are typically very big companies. One example was Apple when it fell to $60 about 4 or 5 years ago. A second example was the big US banks starting about two years ago. I am comfortable going with a very high concentration (sometimes 100% for 6-12 months). People tell me I need to diversify my portfolio. The problem is I do not have other ideas I feel will come close to making the same high probability return.

I did the same thing with FFH (high concentration) a number of times in 2003-2010 back when its price was being driven all over the place when it was listed on the NYSE.

I am trying to reconcile in my mind how being 100% invested in Apple or BAC for 12-36 months (buying when they are out of favour and the stock is selling dirt cheap) is more risky than the many people whose net worth is tied up in a small business.
« Last Edit: December 22, 2017, 09:39:50 AM by Viking »

SharperDingaan

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Re: Portfolio Concentration
« Reply #12 on: December 22, 2017, 09:39:30 AM »
We're in the concentrated camp, and typically hold just 1 company per circle of competence - same as the small business person.

Every small business person we've ever met tries to hedge their intrinsic risk - but risk management execution expertise is very limited. Most use property, some use investment in other businesses, but almost nobody uses cash/t-bills or long term sovereign bonds/gilts.  As risk management execution is in our circle of expertise, we have the luxury of being able to do it in reverse.

We have also broadened 'circle of competence' to now include 'long term thesis' (estate planning kicking in).
We have adopted the 50 year view that Newfoundland will benefit from global warming, and the opening of the NE and NW sea passages to Asia, much as Aberdeen and Scotland have benefited from the development of their off-shore oil fields. Panama traffic shifting northwards, Newfoundland resources going west (oil, iron, fish, removal of land locks, etc.), opening of new resources as Labrador melts. Execution via passive investment ranging from housing through to resource investment through to technology creation. Beneficiaries being today's and future grand kids.

Newfoundland vs BC?
Newfoundland doesn't have the earthquake risk of possibly falling into the ocean tomorrow, and it's a rare 'newfie' who cannot talk his/her way out of trouble via the 'gift of the gab'. Hopefully it works out well for us.

SD



   

no_free_lunch

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Re: Portfolio Concentration
« Reply #13 on: December 22, 2017, 01:56:16 PM »
For Viking and those others who concentrate, do you mind indicating what your portfolio size is relative to your current annual savings rate?  E.g. 15 years of savings.   I don't want to disclose too much but I am say greater than 10 x of annual savings.

SharperDingaan

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Re: Portfolio Concentration
« Reply #14 on: December 22, 2017, 03:15:13 PM »
For Viking and those others who concentrate, do you mind indicating what your portfolio size is relative to your current annual savings rate?  E.g. 15 years of savings.   I don't want to disclose too much but I am say greater than 10 x of annual savings.

Up to the value of a modest 3 BR house in our area, per circle of comptence. After that we start to sell down & return capital.

SD

Cameron

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Re: Portfolio Concentration
« Reply #15 on: December 22, 2017, 03:20:15 PM »
10-12 over as many industries as I can. Sometimes as low as 4.

no_free_lunch

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Re: Portfolio Concentration
« Reply #16 on: December 23, 2017, 06:34:41 AM »
To go back to the core small business / single security debate.  One of the advantages to securities is that you can fractionally own them, this is much harder with a small business.  By going 100% on a single stock I think you are losing out on this advantage.  I can't help thinking that you should be able to find 2 stocks.  Maybe go 60/40 if one is better odds.  Even with berkshire which is perhaps the safest company on the planet , you just never know.  Some legal issue or unforeseen event can always take it down.   Live to fight another day, the way I see it.  If you can find stocks with 100% upside, then you will be able to make it back. Even if you lose half your money on a bad stock pick it will just set you back a couple years until the other stock pays off. 

I think again it really comes down to the amount of time it would take to rebuild your portfolio, then adjusted for your age.   There is a certain point where going all in on one stock just doesn't make sense, in my opinion.  Regardless of the potential return.
« Last Edit: December 23, 2017, 06:44:19 AM by no_free_lunch »

Viking

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Re: Portfolio Concentration
« Reply #17 on: December 23, 2017, 03:52:42 PM »
For Viking and those others who concentrate, do you mind indicating what your portfolio size is relative to your current annual savings rate?  E.g. 15 years of savings.   I don't want to disclose too much but I am say greater than 10 x of annual savings.

My portfolio is large enough that I do not have a day job (I tell people that I am a financial planner with just one client). As my portfolio grows in total value my thinking is starting to shift a little from total return to preservation of capital.

cherzeca

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Re: Portfolio Concentration
« Reply #18 on: December 23, 2017, 07:13:57 PM »
if you want to create wealth, concentrate.  if you want to preserve wealth, diversify.

or do both:  hold large cash position and a few names you like a lot.  i say cash because i am short long term credit.  if rates were higher, substitute credit for cash.

DocSnowball

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Re: Portfolio Concentration
« Reply #19 on: December 23, 2017, 07:19:23 PM »
if you want to create wealth, concentrate.  if you want to preserve wealth, diversify.


Well said! This is the risk variance graph from our corporate finance textbook - as you can see, after 5 stocks the slope of the curve flattens quite a bit; after 20 not much difference on adding the 21st
« Last Edit: December 23, 2017, 08:06:25 PM by DocSnowball »