Position sizing is one issue which bedevils most investors.
How many stocks to own,how much to bet on one stock,when to sell etc are key asset allocation decisions which eventually determine how successful one is in the world of investing.
The book Concentrated Investing-Strategies of the World’s Greatest Concentrated Value Investors attempts to answer these questions by studying the track records and performances of the investing greats-Simpson,Lord Keynes,Buffett, Munger, Siem, Rosenfield etc
Some lessons that I learnt while reading this book are:
- If you are an ordinary or passive investor, you are better off owning a diversified/index fund having many stocks and low fees
- If you are an “active” knowledgeable investor, then you are better off putting your money in a very small number of stocks-Charlie Munger thought 3 stocks are good enough (!) , while for others 10 stocks seems to be a reasonable number
- Investors differ in their ideal holding time-some hold for 2/3 years, some hold forever-at all times, they track the business v closely
- For Concentrated Investing to succeed,its v important that you know the company very well-so much so that you understand the investing case against it better than the person making the argument.
As the authors put it,the lesson of this book condensed into a single sentence is “Bet seldom,and only when the odds are strongly in your favor but when you do,bet big,hold for the long term and control your downside risk”
The Book contains lots of anecdotes and investing war stories which makes for an interesting read.
I was particularly amused by this quote from Sir Ernest Cassel who once said (around 1920…nearly a hundred years ago !)
“When as a young and unknown man I started to be successful,I was referred to as a gambler.
My operations increased in scope.Then I was a speculator.
The sphere of my activities continued to expand and present I was known as a banker.
Actually I have been doing the same thing all the time”