Concentrated Investing
Concentrated Investing

Concentrated Investing

their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time; A steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake; (Location 2199)

portfolios containing increasingly undervalued (Location 3414)

the first of which is that they may fail to consider the opportunity costs of a position. (Location 3519)

He notes that, given that bets of that magnitude must be considered in context with other opportunities, and bets must be less than one’s capital to avoid total loss, Kelly must have indicated betting much more than 35 percent to 40 percent of capital in those cases, and others like them. (Location 3529)

full Kelly betting is characterized by drawdowns that are “too large for the comfort of many investors,” and says, “many, perhaps most investors” will find fractional Kelly “much more to their liking.” (Location 3538)

scenario—an infrequent, unexpected high-impact event—means that the optimal Kelly bet might be overestimated. (Location 3541)

Finally, Thorp noted that “Kelly’s superior properties are asymptotic, appearing with increasing probability as time increases,” but “an investor or bettor may not choose to make, or be able to make, enough Kelly bets for the probability to be ‘high enough’ for these asymptotic properties to prevail,” by which he means that the long run is simply too long for Kelly’s good properties to emerge. (Location 3543)

The deleterious effects of such improbable events can best be mitigated through prudent diversification. The number of securities that should be owned to reduce portfolio risk to an acceptable lever is not great; as few as ten to fifteen different holdings usually suffice. (Location 3552)

30. Klarman, Buffett, and Munger recommend fewer positions—5 for Buffett and Munger, 10 to 15 for Klarman— (Location 3557)

Fisher showed that the margin of safety could be found in the quality of the business, which would allow it grow organically. (Location 3842)

“Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.” (Location 3846)

[W]hat those [successful] companies had in common was they bought huge amounts of their own stock and that contributed enormously to the ending record. (Location 3998)

Siem’s favorite metric for calculating that yield is the earnings before interest, taxes, amortization, and depreciation (EBITDA) in proportion to the investment or capital expenditures (CapEx): (Location 4852)

If he can find an asset that has been laid off—not operating—it will have negative EBITDA because the owners have to pay the layoff costs. Those assets can often be acquired very cheaply. His first, the Haakon Magnus, was such a deal. (Location 4864)

company has allowed him the requisite time to complete many projects. A problem for many investors in terms of expressing their own investment philosophy is that they don’t have this access to permanent capital. A source of permanent capital, whether his own money or that of Siem Industries, is dedicated for the long term and allows him to invest for the long term. He can think differently about an investment than another investor, like the more typical fund manager, who has two tasks: (1) to produce returns and (2) keep the investor base happy. Siem believes that his long time horizon has been central to his success:81 (Location 4867)

Under the stewardship of Buffett and Rosenfield, the endowment bought a handful of positions and then held on to them for decades. Notes Zweig in his Wall Street Journal article on Rosenfield, (Location 5085)

The optimist says, “What if instead of growing two percent, it grows four, and that 1 percent pretax margin then becomes two?” But it can go the other way. It’s a much riskier bet. I look for situations where there is little downside risk if things continue as they are and a lot of money to be made if a few things go right. In other words, a highly favorable risk/reward balance. One example (Location 5848)

And of course, you’ve got to watch it carefully, but that’s my idea of being a value investor as opposed to the traditional Graham and Dodd thing, which was written in the 1930s. It’s totally different. It’s almost irrelevant. (Location 5884)

He also maintains a watch list of diverse companies that he’s examined in the past, that he thinks are first-rate businesses with competent management, but are simply too expensive at prevailing prices. (Location 5892)

John [Shapiro] and I, we’re the yellow pad people. We always did our analysis just on the yellow pad. It makes you much more sensitive to getting something generally right, as opposed to a multivariate, 600-line model that can get everything precisely wrong. (Location 5899)

Is this an advantaged business? How much competition does it have? Can it raise prices? And is it priced at a level where you could see making a very attractive rate of return without much risk of loss? The first thing we decide is whether it’s a good business. And if it’s not, we just drop it. (Location 5910)

How much of the free cash flow is from stock comp versus something else? And what do we assume about that new drug? Did we assume it’s in the numbers or not in the numbers? So I don’t make the model, but I make sure that all the inputs are ones that I feel comfortable with. (Location 5943)

but he always looks at free cash flow yield. (Location 5954)

Greenberg believes that the use to which a company puts its free cash flow is a crucial consideration. (Location 5961)

business is to seek ones that generate a free cash-flow yield of, say, 10 percent in the next year or so, with modest underlying growth of, say, 5 percent. (Location 5969)

He acknowledges that industries like Google’s, which are enjoying fast growth and high profitability, generally attract competition, but he believed that Google had insuperable competitive advantages. (Location 5999)

have to look at the search business and say, “Do I believe that Google’s search business is a business that’s a great franchise and one that’s likely to be around for a long, long time? Does it have advantages that Bing doesn’t have or Yahoo! doesn’t have?” Well, now Yahoo! doesn’t even do their own search. It’s a duopoly like Freddie Mac and Fannie Mae. Who doesn’t like businesses where there are few competitors and where the business has done brilliantly well, and there’s a strong reason to think that it’s going to be able to attract more revenues, and where it seems to have an incomparable advantage? (Location 6002)

He told a story about See’s Candies and how he paid $27 million for it in 1972, and it threw off over a billion in cash flow over the next 25 years, saying, “I always follow the money. (Location 6063)

For Chieftain, that meant the firm maintained no more than 10 positions, with several sized to between 15 to 20 percent of the portfolio’s capital. He notes that it’s difficult to narrow down to the 10 best ideas.72 (Location 6090)

The trick with a very concentrated position is to buy a business where you can’t lose a lot but where you have some idea about why you might make a lot. (Location 6098)

He says that very concentrated investors must focus on stable businesses and avoid those in rapidly changing industries. (Location 6100)

a strong franchise, some sustainable competitive advantage, not too much competition, and outstanding management that’s shareholder return oriented. (Location 6101)

The further down it goes, the more those negative arguments, the worries and concerns start to get front of mind and they begin to prey on you. (Location 6162)

Even if you’ve done a lot of homework, you know things that can go wrong. You know some trends that you’re not too happy about. And you do know that there’s some risk involved. (Location 6167)