tag:blogger.com,1999:blog-2149523431587168680.post7286838019161816952..comments2024-01-16T00:12:23.220-05:00Comments on Oddball Stocks: Thinking about diversificationNate Tobikhttp://www.blogger.com/profile/05660387777171986124noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-2149523431587168680.post-41380660724340629482013-04-04T07:19:56.495-04:002013-04-04T07:19:56.495-04:00Hi
How many compagny in our portfolio ?Hi<br /><br />How many compagny in our portfolio ?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-72999624845840555142012-09-02T14:19:24.260-04:002012-09-02T14:19:24.260-04:00Hi Nate,
Nice blog!
If you are still looking for a...Hi Nate,<br />Nice blog!<br />If you are still looking for a direct quote, take a look at this video. The topic is brought up at about 1:30 into the video.<br /><br />To find the video, search on youtube for "Warren Buffett MBA Talk - part 8".<br /><br />-IgorIgornoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-80414083329810411322012-08-30T07:11:54.947-04:002012-08-30T07:11:54.947-04:00Neither specifically, I don't think anyone jus...Neither specifically, I don't think anyone just invests in net-nets, although some might just buy good companies. I try to buy net-nets when they're attractive, special situations, and the proverbial good company at a great price.<br /><br />As a reference 35% of my portfolio is in net-nets, another 15% are low P/B or low EV/EBIT stocks, about 20% are special situations, and the rest are growth companies. When I say growth I mean moat companies that have growth that I bought when they were cheap and have since recovered.<br /><br />I agree concentrating in net-nets is crazy, but some people do it.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-68797890535831208392012-08-30T07:07:07.644-04:002012-08-30T07:07:07.644-04:00Nets nets ala Graham, and Buffett concentration of...Nets nets ala Graham, and Buffett concentration of holdings in great business are two entirely separate things. Which one are you talking about? Buffetts idea of concentration do not apply to net net investing.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-59584208848691994082012-08-29T23:33:40.629-04:002012-08-29T23:33:40.629-04:00There's a video on neatvalue.com where someone...There's a video on neatvalue.com where someone asked him this question. He said net-nets, special situations and smaller stocks. I'm not Buffett, I never will be so I'm not expecting to do 50% a year, 15% is fine with me.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-35633742968172029182012-08-29T23:32:14.293-04:002012-08-29T23:32:14.293-04:00If there were 1000 stocks that fit my criteria I g...If there were 1000 stocks that fit my criteria I guess I could. <br /><br />I find comments fascinating because often readers such as yourself read things I never wrote but you inferred. If I am looking at 10 ideas and only have enough capital for 5 I'd take the five "better" ideas. What does that mean? I'd probably be some combination of cheapness and prospects. There's no rule that I have to buy all 10 because they fit my criteria for a good investment.<br /><br />As I mentioned in the post, there are 183 companies in Japan trading below net cash. That's a lot of ideas. Expand the investable universe a bit and I'm willing to bet there are easily 500 or more companies that have similar return characteristics. Maybe it's not worth buying them all, but that's a LOT of companies to dig through.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-27453552905693648702012-08-29T22:00:06.785-04:002012-08-29T22:00:06.785-04:00So that means if you have a $10m portfolio, you wi...So that means if you have a $10m portfolio, you will go to 1000 stocks?<br /><br />I am disappointed that the blog writer sees it unfit to comment on an issue that goes to the whole basis of his article.<br /><br />The whole argument, as I see it, against concentrating and for diversification is that one cannot reasonably rank ideas (dubious proposition IMO) and the concentration idea, taken logically, means it is possible to reason for a one stock portfolio.<br /><br />I think the article has missed the whole point. <br /><br />Firstly, 8 to 20 positions uncorrelated positioins will confer close to 95% of the benefits of diversification. Anything more confers very little additional benefit for the additional work involved.<br /><br />Secondly, the idea against overconcentration is to protect against risk of ruin. We need to refer to Kelly's criterion, and the logicality of why a conservative half-Kelly is always better than betting over Kelly. The arguments are muddied somewhat due to the difficulties in determining exact probabilities of risks, which is why positions are usually only a fraction of Kelly's criterion.<br /><br />Thirdly, it is quite...ambitious...to believe that one could have heaps and heaps of great ideas. This goes back to the heart of risk management in value investing.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-66675968944977062192012-08-29T09:56:25.246-04:002012-08-29T09:56:25.246-04:00In answer to Anon above, if all stocks meet the in...In answer to Anon above, if all stocks meet the investment criteria then I guess it would stop based on trading costs. If you have £1000 in an account and you pick 1000 stocks that's not going to work out well, i.e. the trading costs are more than 100% on each stock.<br /><br />As for diversification, I like to think of it in all senses - pure numbers, geography, industry, operational, plus anything else I can think off. It's not just for safety either as some geographies are booming while others are in bust mode, and the same is sometimes true of industries. When one industry get popular you can sell and buy something that is having a hard time, for example.UK Value Investorhttp://www.ukvalueinvestor.comnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-6473372564722903772012-08-29T04:40:02.610-04:002012-08-29T04:40:02.610-04:00Good article, but let's take your proposition ...Good article, but let's take your proposition (adding one more is okay) to its logical conclusion. Where does it stop? The 100th idea? The 1000th idea?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-51824658884389869502012-08-28T20:50:02.180-04:002012-08-28T20:50:02.180-04:00I think it is worth noting that WEB's universe...I think it is worth noting that WEB's universe is much smaller than ours. <br /><br />I was at an annual meeting where he said that if he had only a million dollars to manage, he believes he could achieve a 50% annual return. <br /><br />He did not say how... but I am guessing he would be much more concentrated than BRKB is. <br /><br />Also, during his initial purchase of KO stock back in the 80's, I think he had over 25% of the company tied up in this stock. American Express (during the Salad Oil think).... similar I believe.<br /><br />Tim... thanks for the link. Good article.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-89393488954690714922012-08-28T12:18:25.218-04:002012-08-28T12:18:25.218-04:00I’ll pipe up on this.
First, there are two separa...I’ll pipe up on this.<br /><br />First, there are two separate objectives in diversification which I’ll call (i) balance and (ii) sheer numbers. Balance refers to the avoidance of (or to the seeking out of) heavy exposure to a particular identified risk. If you own 20 stocks and they’re all in construction, you’re diversified in the second sense but not diversified in the first sense. When people talk of this or that supposed guru holding a basket of stocks they are talking about diversification via numbers (the second sense) but concentration in the first sense. E.g. Templeton held very many Japanese stocks in the 1960s: he was diversified but not diversified. Two different concepts. The sense in which you’re applying “diversification” in this post doesn’t apply to, or coincide with, “basket” as used in the conventional sense. <br /><br />Second, diversification (in the sheer numbers sense) is not a binary concept. I know of only one person who would put all their money in one stock. It’s a foolish thing to do, not because one cannot know a stock that well – one can – but because shit happens: acts of god that can hit one stock and wipe it from the face of the earth in the blink of an eye. I know HA very well, for example, but if a nuclear N. Korean (or Israeli) nuclear missile hits Maui, HA is done for. And if all my money’s in that one stock, I don’t get to fight again; I, too, am done for. <br /><br />That’s why I don’t put all my money in my best idea, not because I think Halstead or GEA are just as attractive on a risk/reward basis. I know they’re not. I know that, barring an act of god event, every dollar I devote to my 2nd and 3rd best ideas will reduce the marginal return on my investment dollar. <br /><br />The question then, is how many stocks does one need to own to practically eliminate non-market risk. <br /><br />And the answer depends on what you’re trying to do and what form the playground takes. <br /><br />If you’re trying to mimic the market, 1 stock will do it.<br /><br />If you’re trying to outperform the S&P 500, it could be 500 stocks weighted equally or 500 minus the airlines, whatever that comes out to, say 488.<br /><br />If you’re investing in risky and/or low quality assets – distressed debt, highly leveraged equities, net-nets – you’d be crazy not to diversify massively. With these stocks you’re hoping that something changes, that the future will be different from the present or the past. For 80% or 90% of them, nothing will change – they’ll die. But the Lazarus group will do spiffingly well and will more than make up for the failures. That’s a strategy or pattern that relies on (numeric) diversification, that lives or dies by it. 20 to 30 stocks, equally weighted. That’s what Graham, Kahn, Shloss, etc did and that’s why they did it.<br /><br />If, on the other hand, as “Buffett prime” was (as we know,there is no Buffett, there have been at least three Buffetts), you’re a stock-picker focused on quality issues, 4 to 7 stocks will do it; more will kill your upside. I will venture this: there is no way to earn 30+% annual returns over a full business cycle by holding more than 7 stocks at a time. And that is the context in which most intelligent investment commentary cautions against diversification. In this particular context , diversification is most definitely a bad thing. <br /><br />And I agree with WEB that most small investors should avoid stock-picking altogether and stick with an index (or, even better, a value-weighted index) because stock-picking makes heavy demands of one’s time and one’s character and, unless one enjoys that sort of thing, one will take short cuts – naïve extrapolation of past trends into the future, interpreting market share as economies of scale, etc – that will leave one exposed as naked when the tide goes out.<br /><br />So yes, diversification is very bad -- in some contexts and for some purposes. And yes, diversification is very good -- in some cases and for some purposes. <br /><br />The important thing, in my views. is to match the diversification strategy with the investment strategy.<br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-46618084905716940932012-08-28T11:31:10.773-04:002012-08-28T11:31:10.773-04:00"The problem is we think we might know our be..."The problem is we think we might know our best idea, but we really don't."<br /><br />Indeed. There's a PDF being linked (sorry, don't know what it is) on Twitter about catching falling knives. It noted that the median return was quite poor, but the mean was performed above average. I seem to recall Geoff Gannon saying the same thing about net-nets.<br /><br />So it could be that there's a significant "long tail" to value investing - in other words, it's the few outliers that hit the ball out of the park, pay off the losers, with performance left to spare. That requires diversification, not concentration.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-81234870820772538922012-08-28T10:42:04.671-04:002012-08-28T10:42:04.671-04:00I agree too Nate, good post.I agree too Nate, good post.Richard Beddardhttp://beddard.net/noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-6725930478503257842012-08-28T10:22:46.962-04:002012-08-28T10:22:46.962-04:00Here's a quote from Buffett's 1961 partner...Here's a quote from Buffett's 1961 partnership letter with a brief comment on diversification of the "generals" bucket in his portfolio:<br /><br />“The first section consists of generally undervalued securities (hereinafter called “generals”) where we have nothing to say about corporate policies and no time table as to when the undervaluation may correct itself…Sometimes these work out very fast; many times they takes years. It is difficult at the time of purchase to know any specific reason why they should appreciate in price. However, because of this lack of glamour or anything pending which might create immediate favorable market action, they are available at very cheap prices. A lot of value can be obtained for the price paid…This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.”<br /><br />Here's another quote from his 1958 letter. He was certainly willing to stake a large portion of partnership assets in single ideas. But he wasn't always concentrated. Remember one of his letters noted the total number of positions in the 40 range. But if the opportunity came up, he'd concentrate, essentially when the odds were in his favor. But my guess is having some measure of control over the destiny probably played into his thinking as well.<br /><br />“This new situation is somewhat larger than Commonwealth and represents about 25% of the assets of the various partnerships. While the degree of undervaluation is no greater than in many other securities we own…we are the largest stockholder and this has substantial advantages many times in determining the length of time required to correct the undervaluation.”Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-84907907272777307932012-08-28T03:17:40.389-04:002012-08-28T03:17:40.389-04:00Good post Nate. Agree as long as you find good ide...Good post Nate. Agree as long as you find good ideas that fit your return view they are worth buying.<br /><br />I also looked at my portfolio concentration a while ago and came across a great presentation by Zeke Ashton. <br /><br />I wrote an article about it which you can find here:<br />http://www.eurosharelab.com/newsletter-archive/255-how-concentrated-should-you-be<br /><br />I hope it helps.<br />Timhttp://www.eurosharelab.comnoreply@blogger.com