Rankings   Forums   Features   Help    

Vooch's picture
Do NOT put all your eggs in one basket

A couple months ago, we all got to see "pelcmarek" on the Top 10 list every day.  I admit, I was jealous.

Today, no more.  His portfolio has collapsed into a mockery of being worth only $3,487 (starting with $100,000).  Eventually, it will reach $0.00 if he doesn't sell soon, imo.  And if he does sell, it would take 15 years at a 26% annual compounding growth rate to exceed my portfolio here.

I am reminded once again of the quote on the first page of “Security Analysis” from Horace's “Ars Poetica”: "Many shall be restored that now are fallen and many shall fall that now are in honor.'"

The same will be had by similar portfolios here which follow the same idea of "put all your money in your best idea".  To me, this is a retarded way of investing.  For the others, it's not a question of "if" they collapse, but rather, "when" they collapse.

For the answer, we look to the Buffett Partnership Letter of January 20, 1966.  The key points:
- Do not own more than 100 stocks (I believe Fisher came along later and said, "No more than 20 stocks").
- Do not put more than 40% into 1 stock (this is where pelcmarek failed)
- We probably have had only 5 or 6 situations in our nine-year history where we had over 25% invested in one security.

I cannot stress this enough for those who think they can game the market with their best idea all the time.

Diversify.

- Vooch

P.S.  If you a master, you will own no more than 6-7 stocks personally, imo.  Unfortunately, I am not there yet.

By Vooch at 2007-12-13 01:33 | Stocks | Vooch's blog


Poster child for concentration? - Vooch

Vooch,

Did you really need to call out pelcmarek's portfolio out? He made a mistake - a fairly big one. But, do you need to make him a poster child of concentration? Why didn't you pick me?

What's actually wrong with a concentrated port? I have one.  Are you predicting my implosion?

Bill Gates and Larry Ellison all have "concentrated" ports. So, did Henry Ford and Rockerfeller. Warren Buffett has 99% of his wealth in Berkshire?  Berkshire has diversification within its business areas. Likewise, DFC appeared to have state/user diversification within its mortgage portfolios. It just ran into the mother of all credit crunches. Possibly, right strategy, wrong time.

I don't think you can take this singular event and say concentration is bad. Many people have been successful implementing it. Jeff Bezos - Amazon. Brin - Google. Eddie Lampert - SHLD -- even with its current price, it's been great investment for ESL.
By schin at Tue, 2007-12-25 17:58 | login or register to post comments

schin,You've got three

schin,

You've got three different holdings:  cash and two stocks.  That's a big difference from only 1 stock.

Try buying DFC tomorrow - you won't be able to do it.

- Vooch
By Vooch at Thu, 2007-12-27 16:37 | login or register to post comments

So, one is concentrated? 3 is diversified?

I bet if you get enough seniority in their debt instruments, you'll make money from DFC. On the common stock, no.

So, it's all relative.

By schin at Thu, 2007-12-27 20:23 | login or register to post comments

Senior debt in DFC?

"I bet if you get enough seniority in their debt instruments, you'll make money from DFC"

What makes you think this? The company is in bankruptcy right now, right? There is probably enough equity to pay off the senior note holders, but the best you could hope to do is break even (unless you could get it at a nice discount). Where am I going wrong here?
By smtkr at Fri, 2007-12-28 09:56 | login or register to post comments

diversification depends,

I'd agree that generally putting more than 40% of your net worth into one investment is too much, but that is net worth. If I own one stock only and that represents 20% of my net worth, I'm not putting all my eggs in one basket. Furthermore, some "stocks" are actually quite secure like FXC (USD/CND exchange) as they do not represent any company, so putting more than 40% of one net worth may not be that crazy.


But for regular stocks, putting in more than 40% of net worth is too much. There is always that possibility of WTF moment when the stock goes to 0 before you can even react to sell it. There are many examples of that happening in the past - Nortel, BreX, Enron are just a few. DFC is just another.

For that reason, I think averaging down is a very bad practice. You put in more money into an already sinking ship because you never saw the iceberg.

By adam at Thu, 2007-12-27 20:44 | login or register to post comments

ARG?

Isn't ARG.TO more than 40% of your portfolio?
By schin at Fri, 2007-12-28 01:14 | login or register to post comments

ARG

Yes, but less than 40% of my net worth. :) hehe

Furthermore, ARG is on much safer ground than any bank or something like DFC. The only thing that could kill it is a global economy shutdown, and in that case money would be worth as much as toilet paper, or less. Or maybe if Chile gov't pulls a Chavez or something ;)

ARG has a easy access to large amount of resources from El Teniente (gov't), with a contract to at least 2021 or something like that. Furthermore, El Teniente is making lots of money from ARG operations without doing anything. Finally, this is Chile and has a less radical gov't than rest of South Africa.

Anyway, ARG is less than 40% of my net worth, which is what I was saying before. And if ARG was liquidated tomorrow, I would still get 50% or so of my current value. That is way different from other companies like DFC or even C.

By adam at Fri, 2007-12-28 12:00 | login or register to post comments