Book Review: The Warren Buffett Portfolio

The Book ‘The Warren Buffett Portfolio’ is written by Robert Hagstorm. Robert had earlier written the book ‘The Warren Buffett Way’ and this book is meant to be a companion book to the earlier book.

The Book is an advocate of “Focus Investing” which can be stated as:

“Choose a few stocks that are likely to produce above average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during any short-term market gyrations”

The author believes that the only way active managers can beat index funds is if they follow the Focus Investing approach. In India too, we see PMS fund managers having only 5-15 stocks in their model portfolio in order to beat their benchmarks.

The Book attempts to answer the key Questions for a focussed portfolio:

Q. How do I identify these above-average stocks?

A. Standard stuff of top class mgmt, high return ratios,growing market etc etc

Q. How many is few?

A. The author believes 15. There are studies which show that benfits of diversification whither away as no of stocks increase. Charlie Munger once famously said that 3 stocks is good enough diversification !

Q. What do you mean by concentrate?

A. Using the Kelly Formula to position size the portfolio

Q. How long must I hold?

A. In Buffett’s words, the favorite holding period is forever. You hold till economics of the biz deteriorates or there is a much better alternative available.

The Book was written way back in 1999.The author was working for Legg Mason Mutual Fund where the star manager was Bill Miller. The book was probably a disguised plug for the Fund as Bill Miller’s quotes are numerous in the Book.

Bill Miller also practiced this form of Focused investing. He eventually blew up during the 2008 Crash.

This ironically highlights the risks of this kind of investing. If you are very concentrated, then you risk the chances of blowing up your portfolio.

My personal belief is the anti-thesis of this Book. I believe that concentration is the outcome of a good portfolio, not the input. To illustrate, the late Rakesh Jhunjhunwala put in equal amounts of money (a small % of his then portfolio) in Crisil, Titan and Lupin. Of these 3, Titan compounded handsomely to eventually become 40-50% of his listed portfolio.

Meanwhile , our Bill Miller, still not learning from his blow up has now in year 2023, only Amazon and Bitcoin in his portfolio. Looks like he is primed for another blow up !

There are some folks in India who practice focus investing. I categorise them in two types- Buffett devotees who actually do deep dive in the businesses and trading types whose holding periods are less than 6 months.Some folks in the first category have been successful riding stocks like HDFC Bank, Bajaj Finance etc. But I am sceptical if they can repeat their success in the future as it would mean catching lightning twice !

I would recommend this Book to serious investors who wish to learn more about portfolio allocation and sizing.

3 replies on “Book Review: The Warren Buffett Portfolio”

Yes Raoji, concentration looks good in hindsight.Also something which may have worked wonderfully in the west may not work as beautifully in india. Another case of concentration going nowhere is Mr.Pabarai’s bet on Edelweiss/Sunteck/Rain. Quite concentrated but going nowhere for investors since last 6 years.

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