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John Huber
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I am the portfolio manager at Saber Capital Management, LLC, a Registered Investment Advisor that manages equity portfolios for clients using the principles of value investing and capital preservation in Graham and Buffett tradition. I am also the author of www.basehitinvesting.com (BHI), a... More
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Saber Capital Management
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Base Hit Investing
  • Buffett Vs Munger Vs Schloss And Thoughts On Portfolio Strategy 4 comments
    Sep 19, 2013 12:28 PM

    I was having a conversation about Munger's philosophy vs Schloss' philosophy and had a few thoughts (and below I'll compare their performance results against Buffett's)…

    I often like to look at long term past performance of investors (10 years or longer) to draw conclusions about the effectiveness of their investment approach. I've often discussed on this site the many value investors out there with average returns.

    I used to ask myself 'how can their returns be average when they clearly are smart people who understand business and value investing principles?'

    In most cases, I've concluded that their average results are not because they don't understand effective investment principles, but it's because they are not willing to implement an investment policy that goes against the consensus opinion of the majority.

    I've mentioned before that one of the things that can benefit an investor who is looking for above average long term results is to study a select few investors who have made 20-30% annual returns over long periods of time. They will most likely be value investors, and they all mostly share the same principles, but if you really dig into how they managed their portfolios, you'll notice two key differences in most cases:

    1. They were either very diversified but owned a lot of Graham type stocks at very low prices relative to earnings/assets, or
    2. They were very concentrated and owned just a few select outstanding businesses

    Usually it's one method or the other, but not both.

    • Lampert made 30% for the better part of 2 decades but usually had fewer than 10 stocks.
    • Pabrai has averaged 25% for almost 20 years now, but typically owns 10 stocks or less, etc…

    On the other hand…

    Following either of the two methods is mentally difficult for most people to implement. Following and sticking to Graham stocks is tough. They often are cheap, but they often have mediocre businesses attached to them. They often have problems, and thus the reason they are offered to you cheaply. On the other hand, it's great to own great businesses, but it's mentally difficult to concentrate your portfolio on the best ideas. Far easier to diversify…

    Combining Strategies Dilutes Performance

    My conclusion after studying countless other investors' portfolio holdings and their results is that most investors (even most value fund managers) will end up combining aspects of number 1 with aspects of number 2.

    In other words, they end up using diversification (like Graham and Schloss) and combining it with owning great businesses (like Munger and Buffett). This leaves them with too many stocks at mediocre prices. It's just the way the market works…. great businesses rarely go on sale. Occasionally they do, but not often enough to own 30 or 40 of them at once. This type of portfolio management will just will lead to overpaying for good merchandise, and thus lowering your overall portfolio returns.

    If you want to diversify, you have to own the cheapest stocks in the market, and those typically aren't easy to own. If you want the best businesses, you have to really focus on the best businesses (for an extreme example of the latter, check out Allan Mecham's latest 13-f). Both can work, but too many investors end up sacrificing valuation in the name of quality.

    So it's important to "Think Differently". Invert, always invert.

    Buffett vs Munger vs Schloss Record

    I thought it would be fun to display the results of three of the greatest of all time. Munger was a franchise, high ROC type investor. Schloss was exactly the opposite. He owned cheap stocks. Buffett had elements of both, and it was around this time that he was transitioning from the latter to the former…

    Here are the three head to head during the time they were all running outside capital (Buffett's results are his partnership results until 1969, and the book value growth of Berkshire thereafter). This is like Ruth vs Aaron vs Williams…

    Note: These are gross returns before fees… I wanted to display the effectiveness of the strategy before accounting for various fee structures that the three investors had. But both gross and net returns vastly outperformed the market.

    So Buffett won this three way battle from 1962-1975. Munger retired his partnership after 1975. And despite Walter Schloss coming in third place during the above period (although still crushing the Dow), it's worth noting that Schloss went on the best streak of his career from 1975-1983, averaging in excess of 30% per year during that time period.

    Suffice it to say that each investor had his own style, but they had one thing in common… they all did things far differently than the crowd, and thus achieved results that were far different than the crowd.

    Themes: Buffett, Munger, Schloss
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Comments (4)
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  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    John its a very interesting post! I really admire Walter Schloss and I think it's achievement was incredible, with no computer only value line and 10-K's. My investment philosophy is based on Walter principles.

     

    Walter Schloss once had a security accounting for 20% of the portfolio (maybe the closest thing of "sure thing" he had seen, he just couldn't help himself I guess).
    20 Sep 2013, 08:12 AM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    By the way your blog is a real treasure to study famous investors. Keep up the good work!
    20 Sep 2013, 08:17 AM Reply Like
  • John Huber
    , contributor
    Comments (90) | Send Message
     
    Author’s reply » Thanks Miguel. I appreciate the nice words. Glad you're finding it useful. Yeah Schloss is a role model for me as well, both in the way he ran his portfolio and the longevity it allowed him to have. Plus he lived (from what I can tell) a great life.

     

    And you bring up a good point. In an interview he once gave with Edwin, they did mention occasionally putting 10-15% of their assets in one stock. So it wasn't always 100 1% positions as some people assume when they read he had that many stocks. Often times they had (according to Edwin) 30 or 40 stocks that were tiny positions (just a few hundred shares or so... far less than 1%), because they started buying and the stock went up and they couldn't buy more.

     

    So my guess is, with his performance numbers, his best 20 or 30 ideas at most made up the majority of his portfolio.

     

    In a 1972 interview with Forbes he mentioned buying "15 or 20" of these cheap stocks provides good diversification and allows you to make errors. He made that comment in passing, but still... I don't think he set out to own 100 stocks. It's just that they owned a lot of small positions and a few larger ones.

     

    Interesting strategy to study... Thanks for the comment.
    20 Sep 2013, 09:52 AM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    Yes, I believe 20 to 30 position made around 80% to 90% of his portfolio. I have studying Walter's methods, I wanted to read his autobiography but there aren't that may around.
    But its 16 principles make a good foundation for an investment strategy.
    20 Sep 2013, 10:16 AM Reply Like
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