Friday, May 11, 2018

Words of Wisdom and Big Idea 2

Update on 11 May 2018: Sorry for publishing the draft copy. Amended the draft via the Blogger app and I went overseas to publish them, but end up the draft copy got published instead. 

Before I start talking about my Big Idea 2, here are some words of wisdom I had with A after he read about my previous post.

The conversation are broken down into sessions which I deem are words of wisdom and even if you knew them, it can act as a reminder.

Section 1: Diversification

"The question is about diversification. I have a dual answer to that. If you are not a professional investor, if your goal is not to manage money to earn a significantly better return than the world, then I believe in extreme diversification. I believe 98% - 99% who invest should extensively diversify and not trade, so that leads them to an index fund type of decision with very low costs. All they are going to do is own part of America and they have made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all. That is the way they should approach it, unless they want to bring an intensity to the game to make a decision and start evaluating businesses.

Once you are in the businesses of evaluating businesses, and you decide that you are going to bring the effort and intensity and time involved to get that job done, then I think diversification is a terrible mistake to any degree."

Section 2: 6 Wonderful Business

"If you can identify six wonderful businesses, that is all the diversification you need and you will make a lot of money. I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake.

Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone, working with normal capital, who really knows the businesses they have gone into, six is plenty and I probably have half of what I like best. I don’t diversify personally.

All the people I’ve known that have done well with the exception of Walter Schloss, Walter diversifies a lot. I call him Noah, he has two of everything."

Section 3: Becoming The Expert

"Diversification is the way to go for many of them. But we are definitely those moving deeper into investment, learning more and doing it. For those with experience and competency, we will find things that look so much better and safer than to public. So you find a gem, you put in 20% of your portfolio.

I guess it might be a natural thing to concentrate, or at least only accumulate your best positions as we move towards being an expert. Of course, the important thing is not to over estimate our abilities and kill ourselves."

Section 4: Conversation Between WB and CM

"WB: If we were running only our own money, putting 75% of our net worth in a single position is not a problem if it is something we really have high confidence in. Putting 500% or more of your net worth in a position is a problem. Several times, I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won’t see them often, and the press and your friends won’t be talking about them. Wouldn’t you say, Charlie? 75% is not a real significant amount?

CM: Sometimes, I have had more than 100% in an individual investment.

WB: You just had a good banker. Look at LTCM — they put 25x their money in things that had to converge but couldn’t play out the hand. There are people in this room with more than 90% of their worth in Berkshire. I saw things in 2002 in junk bonds that would have been worth going heavily into. You could have bought Cap Cities in 1974 — selling for one-third the property value, with the best manager, and in a good business. You could have put 100% in Coca-Cola when we bought it and that wouldn’t have been a dangerous position.

CM: Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the exact rule is the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a life-time, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to."

Section 5: Concentration

"Concentration is a passage of rite once someone reaches a certain level, they will find things that makes sense to them. They may still be wrong, but less likely so. Expensive or not we will only see after a while."

Section 6: Share Price

"All I see is some price floating up and down. The market is there to serve you, not to instruct you. Drop in price doesn't mean the company really worth less. In fact, we probably make more money when the volatility of the market is higher.

When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. When price drop, all you have is bargain. The company is still worth so much more. Any drop is temporary and an opportunity. But when value drop, all you have left is an empty shell."

So that's all of the words of wisdom.

As for Big Idea 2, I do not think I will be writing more about it anymore. I have after all written a few post totally dedicated to the company. In addition, the last one I even tried to find out the fair value of the business. Nevertheless, do note that I have held this counter for more than 1.5 years.

The important aspect of Big Idea 2 is that it has a subsidiary and an associate listed in SGX. It also have another associate listed in ASX.

Thus, if the market continue to be on a bull run, I believe Big Idea 2 will also continue to do well and achieve remarkable results when it report its full year financials in August.

Please do your own due diligence before you invest this counter (if you knew what it is).

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