Warren Buffett And The Art Of Focus Investing

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Ibex Investor
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Summary

  • Buffett (BRK.B) stated he would have a portfolio of 4-5 securities if he were managing smaller sums of money ($50 million, $100 million, or $200 million).
  • Most value investors who use a focused approach significantly outperform the market.
  • The secret to this approach is the Kelly Growth Formula for portfolio allocation.

"If I were running $50, $100, $200 million, I would have 80 percent in five positions, with 25 percent for the largest. In 1964 I found a position I was willing to go heavier into, up to 40 percent. I told investors they could pull their money out. None did. The position was American Express after the salad oil scandal."

-Warren Buffett; 2008 Berkshire Hathaway (BRK.A) Annual Meeting

Source: Dang Le, "Notes from Buffett meeting 2/15/2008," Underground value blog, February 23, 2008; also cited in The Kelly Capital Growth Investment Criterion by Edward Thorpe, William Ziemba, Leonard Maclean

"Back in the 1960s I actually took a compound interest rate table and I made various assumptions about what kind of edge I might have in reference to the behavior of common stocks generally. I knew from being a poker player that you have to be heavily when you've got huge odds in your favor (he concluded as long as he could handle price volatility, owning as few as three stocks would be plenty). I knew I could handle the bumps psychologically because I was raised by people who believed in handling bumps. So I was an ideal person to adopt my own methodology."

--Charlie Munger; D*mn Right! By Janet Lowe

Introduction

Today I briefly wanted to illustrate the concept of a focused investing approach. I remember when I started investing nobody ever seemed to have a methodology as to how many stocks to have in their portfolio or how to decide which amount/percentage to place of each stock in a given portfolio. Obviously there was the academic theory of diversification taught in most finance classes that advocated 50-100 stocks, but it continued to puzzle me that it was so difficult to find information on a more focused approach. In this article I'll attempt to outline

This article was written by

Ibex Investor profile picture
880 Followers
Twitter: @IbexInvestor; (https://twitter.com/IbexInvestor) Value investing partnership/hedge fund with a focus on value investing and special situations. The portfolio is very focused, and I typically hold between 20-25 individual long positions in common stocks. I received my MBA in analytic finance and economics from the University of Chicago's Booth School of Business in March of 2013, where I learned a significant amount about investing. Over the course of my life I've learned immeasurably more from a class that occurs one Saturday every year in Omaha, Nebraska. The class is virtually free of charge, and taught by two elderly men named Warren and Charlie. They teach me more about investing, business and life in 8 hours every year than a lifetime of MBA classes could, and I'm eternally grateful to them. I am also a licensed certified public accountant (CPA) in the state of Illinois.

Disclosure: I am/we are long MKL, BRK.B, DVA, MA, ESRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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