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Choivo Capital

Author: Choivo Capital   |   Latest post: Sat, 6 Jul 2019, 5:16 PM

 

(CHOIVO CAPITAL) To Diversify or Not to Diversify, That is the question.

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To Diversify or not to diversify, that is the question. And that was a question i've constantly asked myself. The following few pages from "The Art Of Value Investing" by Whitney Tilson really helped me. I hope you will find it useful as well.

 

 

CONCENTRATION VERSUS DIVERSIFICATION

One of the most basic elements of portfolio strategy is determining the number of positions to hold. While the subject of much analytical research over the years—about which accomplished investors are typically well versed— the question of how concentrated or diversified one's portfolio is often appears driven as much by personal experience, comfort level, and “feel” than anything else.

 

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When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had twenty punches—representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all.” He says, “Under those rules, you'd think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better.” It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.

—Charlie Munger, Poor Charlie's Almanack

 

The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.

—Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter

 

Value investors should concentrate their holdings in their best ideas; if you can tell a good investment from a bad one, you can also distinguish a great one from a good one.

—Seth Klarman, The Baupost Group

 

In our separate accounts we typically hold 10 to 15 securities. In our partnership we're typically more concentrated, with the top five positions making up about 65 percent of the portfolio. If I didn't have partners, our concentration would be even higher. You know how much of Warren Buffett's partnership held in American Express when he bought it after the DeAngelis salad-oil scandal? 40 percent or so. A company compounding capital at way above-average rates, when I have great confidence that will continue and the valuation is modest, I want to hold it at a size where it can have a material impact on the portfolio. The rationale is that simple.

—Chuck Akre, Akre Capital Management

 

We typically have 15 to 20 positions. Our general feeling is that if we don't like something enough to own a 5 percent position in it, we should wait to find something else. Put another way, if the only way you can feel comfortable about an idea is to own less of it, to my mind that tells you something about the quality of the idea.

—Andrew Jones, North Star Partners

 

We're deliberately concentrated on 10 to 14 investments, for two reasons related to time. First, it takes considerable time to learn enough about a company, its people, and its industry to develop and maintain a proprietary level of insight information, or knowing more than the Street. The second relates to our focus on activism: pushing for change at companies takes a lot of time. I will say that I have in the past fallen into what I call time traps, where I've spent too much time trying to resolve problem investments. We will pick our battles, but usually we're better off helping our best investments maximize opportunities than trying to perform brain surgery on dogs.

—David Nierenberg, D3 Family Funds

 

Owning fewer than 15 stocks I'd have more risk of being wrong with one company than I'd like. At the same time, if I owned 30 to 40 stocks, experience tells me that roughly half would be my favorites and other half would either have less upside potential or more risk. Rather than force myself to make that choice between less upside and more risk, I would rather just limit the number of individual holdings to 15 to 20. Most managers would buy the stocks with more risk rather than give away upside, which can often offset whatever benefit they think they are getting from greater diversification.

—Ed Wachenheim, Greenhaven Associates

 

We're not playing a probability game, where you invest in 100 businesses and do fine if 70 of them succeed and 30 do poorly. We're trying to select 25 to 30 businesses to own and we count on all of them doing well over a five-year period.

—Timothy Hartch, Brown Brothers Harriman

 

We think there are profound research advantages in concentration. This is a world of very smart people and you can't enter that marketplace without a profoundly humble view about how you're going to win. For us, concentration and depth of research allows us to go to bed at night and feel like we have a defensible source of our returns.

—Adam Weiss, Scout Capital

 

We ideally hold 25 to 35 positions, with a core holding at around 5 percent. That gives us most of the free lunch of diversification and allows us to maximize return by owning only our best ideas. There's also a human element to limiting our number of positions. With 25 to 35 stocks, our entire investment team knows every company and can have a clear opinion on it. With 100 stocks, you can't do that. The portfolio manager can only know how well each individual analyst is doing by the performance of his or her picks, as opposed to evaluating the decision inputs. Suddenly, the reality of reviews and compensation force you to look at that performance over shorter time periods than you should. The analyst knows that, of course, so then starts worrying about whether Wal- Mart's same-store sales next month are going to disappoint, rather than whether the company is creating long-term value. So we think a long-term strategy just works best with no more than 35 stocks.

—Boykin Curry, Eagle Capital

 

We typically hold 30 to 35 stocks. We cap any one position at no more than 6 percent of the portfolio, but we won't put anything in the portfolio at less than a 2 percent position. Setting things up this way keeps us from being distracted, makes us dig that much harder for truly interesting ideas, and forces us to make active decisions. Any one holding is too important to let slide if it's not working, and there's always healthy pressure on existing holdings from new ideas. We want to take away the drag of inertia, which can be very strong in human psychology.

—Mariko Gordon, Daruma Capital Management

 

We're fairly concentrated, with about 70 to 75 percent of our capital in our top 20 positions, so we know what we own and don't need a lot of statistical analysis to figure out where we're exposed. We think concentration is the key to big performance, but we also have no desire to have our year depend on one or two things working out, so we have generally kept our largest positions at 5 to 8 percent of total capital and make sure those big positions are not particularly speculative or highly levered.

—Gary Claar, JANA Partners

 

Our view is that too much diversification in many cases reflects the fact that the portfolio manager isn't doing the work to fully understand the businesses. If you do the work and find a great business run by great managers at a great price, that ought to express itself in the size of the holding within your portfolio. It's uncommon for us to go above 10 percent on cost in a given name, but we've held appreciated positions as high as 20 percent of the portfolio. We generally don't think you can have too much of a good thing.

—Peter Keefe, Avenir Corp.

 

When we see competitors holding 75 to 100 positions, with 75 to 100 percent annual turnover, we're either very impressed with their ability to keep track of 150 or more companies . . . or we're skeptical of their ability to credibly follow that many companies. We don't have anywhere near that many good ideas in a year.

—Eric Ende, First Pacific Advisors

 

Given that our funds are concentrated both in the absolute number of positions we hold and in the number of industries that are represented, it's natural for our performance to be lumpy. If the alternative is being consistent but mediocre, we would much prefer to be streaky but good.

—Wally Weitz, Weitz Funds

 

Diversification is an important part of our risk management. Average individual positions range from 1 to 2 percent, with the largest core positions at 4 to 5 percent. In 15 years, we've had three positions that got as high as 8 percent, two that worked out very well and one, Tyco, that was a disaster at the time. An important percentage of the firm's total capital is our own money and we're just trying to do what we think is intelligent in a highly uncertain world. I don't know how some of these young hedge fund guys do it, being 160 percent gross long and 40 percent net long. I'm not questioning anybody, but if you're running a lot of capital, to be that gross long you have to either have enormous positions where you give up liquidity or you have to have an incredible number of positions, too many to follow effectively. Our level of diversification reflects our unwillingness to make such giant bets or to give up liquidity. We could liquidate our portfolio in 48 hours.

—Leon Cooperman, Omega Advisors

 

With six analysts and the amount of money we have, [50 to 60 positions] has turned out to be what we feel we can best manage. It's not more concentrated out of prudence and humility. There's always a chance we'll be wrong on any given idea.

—Spencer Davidson, General American Investors

 

Part of our rationale [for holding more than 300 positions at a time] is just the practical reality of running $8 billion in a small-cap strategy—with that much money, you can't hold 50 stocks without moving well out of smallcap range for many of them. Another practical consideration is our investor base, which is retail investors and large institutions. Performance obviously matters when they choose T. Rowe Price to run their small-cap assets, but they also want to be comfortable that the portfolio isn't going to blow up. For many investors volatility is the enemy of rational investment decisions, so the less volatile we are, the more likely our investors won't sell at the bottom and buy at the top. Running with the level of diversification we have, the standard deviation of our returns has been lower than that of our benchmark Russell index. Philosophically, I find broad diversification makes it easier to be a contrarian. We made the mistake in 2007 of buying some housing, recreational vehicle, and mobile home stocks after they fell 50 percent, which clearly turned out to be too early. But because of the way we run the portfolio and our recognition of the risks involved, we never made those holdings, in aggregate, more than 3 percent of the portfolio. While that particular out-of-favor bet hasn't paid off, it hasn't hurt us much either. As long as the potential upside is high, we should be making those types of investments and they can make a real difference when they work.

—Preston Athey, T. Rowe Price

 

Small-cap stocks by definition are more fragile, more likely to have one dominant product or one key executive or one big customer. Strange things happen, so you have to diversify no matter how much you may love individual names. When something strange happens in one of Johnson & Johnson's or GE's businesses, it's a rounding error to the overall company. In a small-cap it can blow it up, so you don't want to be overly exposed in any one name.

—Whitney George, Royce & Associates

 

Concentration and micro caps don't mix well, so we typically own around 100 names, with a big position being 3 to 4 percent of the portfolio. Tiny companies are by definition more vulnerable to catastrophe if something goes wrong, so we try to limit the potential damage from that by owning a lot of them. I've had people ask if we're spreading ourselves too thin by owning so many positions at a time. What I answer is that there's an enormous difference in the effort required to follow a big company than a small company. I'd argue that a portfolio of 20 large-cap companies, each of which is in five or six distinct businesses, is more difficult to keep track of than 100 small companies that typically operate in a single niche. An IBM or a Disney can have a single footnote longer than a lot of the entire annual reports I look at.

—Paul Sonkin, Hummingbird Value Fund

 

Our level of diversification [130–140 positions] is just spreading the risk. It serves us well during downturns, which was certainly reinforced in 2008. I think it also makes us less emotionally attached to ideas and more willing to admit we're wrong, which is important for any investor.

—Tom Perkins, Perkins Investment Management

 

Our flagship mutual fund today has 300 stocks. Buying things when they meet the valuation characteristics that have worked for us in the past is our selection methodology, period. It's not about picking the best 5 percent, 10 percent, or 20 percent of those—I don't know which ones those are. We've done a distribution analysis of our winners and losers: 18 percent of our stocks have lost 50 percent or more, while 25 percent have made 250 percent percent or more. The math has worked in our favor by exposing ourselves to as many multibaggers as possible that meet our valuation criteria at the outset, and then patiently waiting.

—John Buckingham, Al Frank Asset Management

 

While we've generally avoided being hurt by underhanded executives, that risk is always there and it's far more pronounced if you're running a concentrated global portfolio. A second reason we're more diversified [with up to 150 stocks] is because I believe a lot of our alpha comes from being in the right sets of companies rather than the right specific

companies. If we get the themes right, we'll do as well, with lower volatility, owning more names rather than fewer.

—Oliver Kratz, Deutsche Asset Management

 

The knock on funds as diversified as ours is that they're index-huggers, which given the geographic breadth of where we invest, is not at all the case for us. I know the argument that you should only own your best 30 or 40 ideas, but I've never proven over time that I actually know in advance what those are.

—Jean-Marie Eveillard, First Eagle Funds

 

 

THE SIZE THAT FITS

A corollary to the determination of how many positions generally to hold is how to size those positions relative to each other. Tolerance levels for larger position sizes obviously vary, but even the most concentrated investors at some point typically respect the admonition to not put too many eggs in one basket.

 

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We believe in constructing the portfolio so that we put our biggest amount of money in our highest-conviction idea, and then we view the other ideas relative to that. We find things that we think are exceptional only occasionally. So if we find something that is really set up, where we think it's mispriced, where we have a good understanding of why it's mispriced, where we think the mispricing is very large and the overall risk is very small, we take an outsized position to make sure we give ourselves the chance to be well compensated for getting it right.

—David Einhorn, Greenlight Capital

 

We're in the camp that there just aren't that many good ideas and when we identify one, we want to make sure it can have a meaningful impact on performance. The biggest holdings are those in which we have the most conviction, which is a function of several things: the size of the discount, the potential for intrinsic-value growth, having a clear and strongly held variant view, identifying a meaningful catalyst or catalysts, liquidity, and the extent of the positive impact on portfolio diversification.

—Steve Morrow, NewSouth Capital

 

Perfect investments have three layers of return. The first layer is the short term return to what I'd call static intrinsic value. The second one is when the business, strategy, and management turn out to be what you think they are and there's real value creation. The third layer, if you're really lucky, is when the market gets so excited that it discounts more and more of the future into the present. The big homeruns are usually there. I always try to find at least two layers of potential, but it's also important to recognize when you put something in your portfolio whether it's a one layer or a two-layer name. You should make a two-layer name a bigger position.

—Lisa Rapuano, Matador Capital Management

 

We're looking for a total annual return of at least 25 percent, with position sizes adjusted for the degree of difficulty. For a given expected internal rate of return, the lower the outcome's expected volatility, the higher the position size. We create an estimated risk-adjusted Internal Rate of Return for everything and then allocate the portfolio based on that.

—Steven Tananbaum, GoldenTree Asset Management

 

In holding around 40 stocks at a time, we're trying to get the appropriate balance between diversification and putting most of our dollars in the names we like the best. As a practical matter, it's difficult to find 40 names that you really like. The lion's share of your excess returns will come from a few names—the trick is identifying which those will be and placing bigger bets on them. Our clients typically require we limit maximum position sizes to 4 percent, but even with that restriction it makes a big difference in results over time if your largest positions outperform.

—Paul VeZolles, WEDGE Capital

 

Our position sizes are set based on how well each company fits our three investment criteria [valuation, business quality, and balance sheet strength]. If it clears each hurdle with flying colors, it will be at the top end of the portfolio in terms of position size. If, say, it's cheap and the business economics are fine, but it just clears the hurdle on financial soundness, it will be at the bottom end. That gives a risk/reward profile to the entire portfolio—it's perfectly fine that our deepest-discount stocks may not be our biggest positions.

—George Sertl, Artisan Partners

 

Our positions tend to be equally weighted. We know there are potential errors in the portfolio, which we'd obviously avoid if we could predict what they were. Since we can't, we assume the future errors are randomly distributed, which is a primary reason we equally weight the positions.

—Bernard Horn, Polaris Capital

 

My view is that whatever edge I have comes more from knowing where to shop than knowing specifically which of the items I buy will be the best. So I maintain roughly equal stakes to reflect that.

—Ralph Shive, Wasatch Advisors

 

For each position we define a downside price at which the stock would trade if everything about our thesis turned out to be wrong. In deciding whether to put something into the portfolio, we'll assign probabilities and look at the expected value, but the downside is particularly important in sizing the position. We don't want to lose more than 100 basis points in return in any one position, so if our downside is 20 percent below the current price, say, we'd put on no more than a 5 percent position.

—Curtis Macnguyen, Ivory Capital

 

Our calculated downside price is extremely important in how we size positions. We limit each position to a maximum risk, measured in basis points, to our downside price. In other words, if a stock went to its downside price, we don't expect the fund to lose any more than the maximum risk we've defined for that particular position.

—Jeffrey Smith, Starboard Value

 

Being concentrated doesn't mean we'll just take the 15 best ideas we have and plug them into our portfolio. Because of that level of concentration, the companies we choose will overall likely be less cyclical, with more stable underlying business models. We at the margin will be less apt to hold names with higher expected values if that coincides with much larger downside risk.

—Lee Atzil, Pennant Capital

 

In periods of rapid change in liquidity and economic conditions, the odds that we're simply wrong about our estimates of companies' near-term fundamentals are higher than average. As a result, we're more focused then on maintaining flexibility—through cash levels and buying power—and in sizing our bets according to the medium- to lower-confidence environment we're in. We won't necessarily make fewer bets, but they'll be smaller in size.

—Larry Robbins, Glenview Capital

 

What tends to happen is that as the market gets more expensive we take on more, less discounted names, and when the market is less expensive, we'll have fewer names trading at bigger discounts. At the market peak in 2007, for example, we held about 40 names in our large-cap portfolio and the overall price-to-value ratio based on our estimates got to 82 percent. The other extreme was March 2009, when our weighted-average price-to-value ratio got down to 40 percent and we concentrated the portfolio in 18 names.

—C.T. Fitzpatrick, Vulcan Value Partners

 

Our fund usually has 40 to 60 positions. The actual number at any time is usually a function of how pricey the market is: When discounts are larger, the full weights tend to be 2 to 4 percent; when discounts aren't as large, position sizes are more like 1 to 3 percent.

—Eric Cinnamond, Intrepid Capital

 

I will not put more than 5 percent of the portfolio in any stock, and we usually don't have more than 2.5 percent. Early in my career I had 20 percent of my portfolio in Johnson & Johnson just before Tylenol was laced with poison. My objective is to produce an above-average, long-term return, and I think I can do that without taking that kind of concentration risk. Things happen. If I really knew the best stock in my portfolio I'd put 100 percent of the portfolio in it, but I don't. [Financial columnist] Dan Dorfman once asked me in an interview what the best and worst stocks were in my portfolio. I told him the worst stock was Converse, the shoe company, which he dutifully reported in his column. It got taken over two days later, up 50 percent.

—Robert Olstein, Olstein Capital Management

 

Our not letting single positions get to more than 5 percent of the portfolio is a function of having seen the stocks of too many good companies fall off a cliff as a result of something out of left field. One example I like to use is when Merck announced it was pulling Vioxx off the market in 2004. You went to bed with the stock at $45 and woke up with it 25 percent lower. I'll give up some of the upside you might get from an outsized position in order to be better protected from a risk you couldn't possibly foresee.

—Robert Kleinschmidt, Tocqueville Asset Management

 

COGNIZANCE OF CORRELATION

A portfolio's level of concentration or diversification can clearly go beyond just the number of stocks held, also encompassing how apt holdings are to move in concert as a result of market moves or broader macroeconomic and industry trends. To some investors this is critical input into the portfolio's risk/return profile, while to others it's only a passing reference.

 

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We have what we call a risk-bucket model. We look at the sensitivity of each of our holdings to several macroeconomic factors: Is it economically sensitive or recession resistant? Is it hurt or helped by increases in energy prices or interest rates or the dollar? Does it have political or regulatory risk? By assigning positions to any appropriate buckets, we can better understand the extent of the risks we're taking on a portfolio level. There aren't any triggers or limits, but we need to know our exposure to things like widening credit spreads or a higher dollar's impact on exports, and then be comfortable with that exposure. This comes most into practice when we're considering a new buy and want to know its potential impact on portfolio risk and diversification.

—Steve Morrow, NewSouth Capital

 

We tag every stock in our portfolio for more than 40 possible spread-risk factors on which stock prices can diverge dramatically. The factors include common ones like sector exposure, market cap, liquidity, leverage, and dividend rates, and maybe less obvious ones like exposure to China or the constitution of the shareholder base. At any given time, for example, we'll know that 16 percent of our longs and 13 percent of our shorts are in highly leveraged companies. We'll know our exposure to companies that should perform well in an inflationary environment versus those that won't. We focus on managing the spread risks between our longs and shorts so that we don't have significant exposure to unintended bets. We want our returns to derive from our skill as analysts and not from all the other factors that can create price volatility. In other words, the goal is for our longs and shorts to move relatively in sync with each other while we wait for fundamental catalysts to revalue our longs upward and our shorts downward.

—Curtis Macnguyen, Ivory Capital

 

We're keenly focused on how our holdings line up as cyclical or noncyclical. We have a lot of macro concerns, but it's difficult to translate those into an investment strategy when our investment horizon for individual stocks doesn't match up particularly well with how the macro issues may play out. Our base-case position is that the U.S. economy will sustain tepid growth through the dramatic deleveraging process the country is going through. But that may play out in a relatively organized fashion over 20 years (witness Japan), or it may cause a severe crisis in one to two years (witness what's going on in Europe). Our approach in the face of all that has been to keep the portfolio somewhat balanced between cyclical and noncyclical exposures, while being tactical in moving toward or away from either.

—Timothy Beyer, Sterling Capital Management

 

I never pay attention to sector or industry concentrations—I don't believe it's a reliable tool for diversification. Enron and the banks that lent to Enron were in entirely different sectors, but their fortunes were tied by that relationship. If I own Nestle, am I geographically diversified by holding a company that has its headquarters in Switzerland but earns almost none of its revenue there? I do pay attention to codependencies of outcomes between companies and think true risk reduction comes from purchasing securities that are inversely or noncorrelated. For example, owning natural gas producers, which benefit from a rise in natural gas prices, and also holding naturalgas- based utilities that benefit from a price fall would reflect hedging for inversely correlating outcomes. An example of noncorrelation is the relationship that mostly exists between the economic climate and the volume of securities traded on exchanges. While the economic climate may impact many securities we hold, the success of the publicly traded exchanges we own is largely independent of it.

—Murray Stahl, Horizon Asset Management

 

We pay attention to end-market diversification, within our companies and across the portfolio. One large holding in a company with five separate global financial businesses is probably more diversified than five holdings in similar regional bank stocks. Our goal is to own businesses with uncorrelated enough end markets that we can continue growing the intrinsic value of the portfolio in any kind of market.

—Brian Bares, Bares Capital

 

Long/short funds typically don't blow up because they made a bunch of wrong fundamental stock picks. They blow up because they're overexposed to correlated sectors, or they own too many leveraged companies, or they have too many illiquid positions. These are explanations you see all the time in funds' letters to investors. That's exactly what we try to avoid.

——Curtis Macnguyen, Ivory Capital

 

Our rule is to own something in every sector, in part to avoid missing something important because it's out-of-sight, out-of- mind. We're not a slave to our benchmark—the Russell 2000 Value Index—but I typically don't go much below half, or much above twice, the index weighting in any sector. I've found that gives us plenty of room to beat the index, while avoiding the type of relative volatility that makes most investors nervous.

—Preston Athey, T. Rowe Price

 

We have sector limits, at plus or minus 10 percentage points from the percentage weighting of the 10 S&P 500 industry sectors. That gives us the flexibility to zero out sectors that are less than 10 percent of the index— like utilities and telecom today—or overweight fairly heavily in sectors we find attractive, such as energy. But it does put limits on how under- or overweighted we can be, which we think provides prudent diversification and risk management.

—Daniel Bubis, Tetrem Capital

 

One of our biggest mistakes was ten years ago, going too heavily into emerging market closed-end funds, which were selling at 25 to 30 percent discounts. When the Russian debt crisis hit, the NAVs got hammered. It's one of the first lessons you learn: be diversified enough that if that 1-in- 100 event happens, you don't blow up.

—Phillip Goldstein, Bulldog Investors

 

In our flagship domestic and international products we do not hold individual positions over 5 percent and will not have more than 30 percent in any one sector. Historically, whether it was energy in the 1980s, technology in the late 1990s, or financials more recently, when a single sector approaches 30 percent of our portfolio or of the market that signals the end rather than the beginning of great investment performance.

—Jerry Senser, Institutional Capital LLC

 

We cap a given industry's exposure at 25 percent of the portfolio, which is a check on the innate lack of humility we often have as investment managers. Owning five or six 4 percent positions in an industry is a good, strong bet, but also isn't betting the house on how smart we are relative to everyone else.

—Jeffrey Bronchick, Reed, Conner & Birdwell

 

People tend to assume that the only form of active portfolio management is through relatively concentrated portfolios. We think there's an equally legitimate form of active money management in running a diversified portfolio that has nothing to do with the benchmark.

—Charles de Vaulx, International Value Advisers

 

We don't benchmark at all. I don't care if we own almost no financials and I don't care if we own an excess amount of energy. We'll go where we think the value is and let the weightings fall where they may.

—Steven Romick, First Pacific Advisors

 

We've purposely avoided basing our bonuses on performance against benchmarks. We're always running into managers who say they're unable to look at certain stocks because they don't fall within a prescribed benchmark. They tell us, “I can't take the risk. If I buy it and it goes down, I'll have to write all sorts of memos explaining it, and I'll get less bonus because my portfolio went down more than the benchmark.”

—Bernard Horn, Polaris Capital

 

You can understand why many succumb to the pressure to hug the index, so to speak. But we believe if you go down the road of trying to make sure you'll never do much worse than the index, you're almost insuring that you'll never do well enough to justify your compensation as an active manager.

—Bill Nygren, Harris Associates

 

The only way to add value as an active manager is to be persistently different than the index. We tell prospective clients that if their main goal is to minimize standard deviation around the index, save money and buy an index fund.

—Jeffrey Bronchick, Reed, Conner & Birdwell

 

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Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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qqq3 your own money, do what you want...

other people money is a different ball game.
01/07/2018 1:50 PM
Patron i realize many of these fundamentalists like to write long essays quote this quote that but their results ain't that impressive. IMO
01/07/2018 1:51 PM
qqq3 Posted by Patron > Jul 1, 2018 01:51 PM | Report Abuse

i realize many of these fundamentalists like to write long essays quote this quote that but their results ain't that impressive. IMO
===============

hammer hit nail on its head.
01/07/2018 2:04 PM
qqq3 quote this quote that....gets respectability.
01/07/2018 2:05 PM
lizi fundamentalist is just one piece of the puzzle...why 80% cannot perform? same to so called fund manager, the professional one, also cannot perform.
01/07/2018 2:06 PM
qqq3 the days of throwing darts and get big winners are over.

those who can preserve wealth are the champions.

I think I have preserved my portfolio very well the last 6 months.

and I will continue to preserve my portfolio very well in coming 6 months.
01/07/2018 2:15 PM
qqq3 To Diversify or Not to Diversify,


every thing is about timing, about big picture and about objective.
01/07/2018 2:18 PM
qqq3 as far as big picture is concerned....I trying my best to be bullish, to be positive, I look for reasons to be bullish.....but it is such a difficult task.
01/07/2018 2:21 PM
qqq3 should we have big picture before investing and doing asset allocations? and what if our big picture is wrong? why should we have a better big picture than the rest of the market? what makes anyone think he can have a better big picture than the market?

we all want to be accurate but how do we know we will be accurate?
01/07/2018 2:41 PM
Choivo Capital Correct.

It's easier to talk about investing than actually getting good results investing.

In addition, many people can show good 5 year results due to luck.

I'll find out if I have alpha in another 18 years :)

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Patron i realize many of these fundamentalists like to write long essays quote this quote that but their results ain't that impressive. IMO
01/07/2018 13:51
01/07/2018 7:59 PM
Choivo Capital Qqq3, you must have a very low opinion of people.

Just because someone quotes buffet, does not necessarily mean people will respect them, look at icap boss, he quotes the most, but his name now is dirt.

I don't strive to be respected. I strive to intellectually honest with others and myself. And one often finds that respect comes with the package.

Im superclear about my fund, its philosophy and the kind of investor I am. My investors can then self select if they want their money invested by me.

In any event, guaranteed amounts are only 22% of the fund, which is about 30% of my equity in the fund. So it's not like I'm over leveraging.

Thy also have a 3 year lock up. And my name when it comes to money is gold. I always pay my debts.

Usually 3 months or so before end of lock up period, I'll ask them if they plan to withdraw. And adjust accordingly.

If they want to, my personal savings can usually cover any redemption instantly.
01/07/2018 8:07 PM
Flintstones Is Jon really investing other peoples money? I thought all his letters to investors were written to imaginary people.
01/07/2018 8:11 PM
Choivo Capital All fund managers are limited by a few things.

1) Their ability.
2) The need to at minimum match the performance of the index or their fellow managers.
3) To handle the expectations of their investors when it comes to redemptions. In 2009 many fund managers were holding net cash positions as their investors were pulling out money in the peak of the crisis.

Im only limited by the first. On the second and third, I sieve through my investors very very carefully and tightly. This ensures that I have a investors that are 100% with me.

I would rather not manage your money at all if you don't trust me or understand my process.

For those whom I think don't really understand the process but they really trust me and my ability, I ask them to invest using the guaranteed method.

========================================
lizi fundamentalist is just one piece of the puzzle...why 80% cannot perform? same to so called fund manager, the professional one, also cannot perform.
01/07/2018 14:06
01/07/2018 8:13 PM
newbie911 Mind to know min to join?
And how big is your fund.
Thanks.
01/07/2018 10:31 PM
FamousAmos 26 years old , pretty impressive already. my suggestion to the fish is , try to study the general conditions - the macros. i will say most of the fundamentalists are smart but being smart is probably the least important thing in the market. I am up 60% YTD and yes I have been in the market > 10 years , been through enough booms and bursts to give you my opinions.
02/07/2018 10:41 AM
CharlesT Posted by Jon Choivo > Jul 1, 2018 07:59 PM | Report Abuse

Correct.

It's easier to talk about investing than actually getting good results investing.

In addition, many people can show good 5 year results due to luck.


One day U may find that not many people can show 5 years good results due to luck
02/07/2018 10:46 AM
CharlesT In addition, many people can show good 5 year results due to luck.

If yr above statement is referring to OTB then u have lots more to learn fm stock mkt, young man.
02/07/2018 10:48 AM
FamousAmos do you know where is the 10 years MGB-Tbills spread trading at ? what is the level of dollar index? hows the MSCI emerging market index? oil price? Dow ? Hang Seng ?

By studying the macros you will enhance your portfolio return.

"Rising tide lifts all boats."
02/07/2018 10:49 AM
qqq3 fooled by randomness.
its ok, almost all human activities have randomness.

but life goes on.
02/07/2018 10:50 AM
CharlesT If u stay in mkt longer, say for another 4 to 5 years, then u read again what u posted now, maybe u will have a very different thinking then
02/07/2018 10:53 AM
Choivo Capital Posted by CharlesT > Jul 2, 2018 10:53 AM | Report Abuse

If u stay in mkt longer, say for another 4 to 5 years, then u read again what u posted now, maybe u will have a very different thinking then

======================================================================


You are probably right, it would be weird for me not to change any aspect of my thinking or perspective over five years.

On OTB, i was not specifically referring to him, like i always said, he's a very good trader. But i'm not sure how sustainable is his current alpha, as the philosophy does not hold water with me. Its not just the results but the process as well.

Bull traders usually beat the broad index over the bull years and in down years really get whack, then they beat index again etc.

Tbf, Otb did beat the market in 2015. In 2018, his returns were supposed to be abysmally bad, but he cut loss in time, which is in line with is ta philosophy of cutting loss when SMA down 200.

My only criticism of his philosophy, is that TA to me, appears to be the tool used by people who don't know the real value of what they buy, or view stocks as just numbers on a screen, with more concern of what others and the market is thinking, instead of having independent thought.

During the years when warren buffet bough Washington Post and American Express. His portfolio went down by more than 50%. And yet, he was never happier, just buying more and more every day.

That to me is the sign of real ability.

1) To be able to identify the intrinsic value of companies.
2) To buy more or hold as prices fall,
3) To be right.

I'm not sure he hits those 3.

He says to buy masteel (i dont subscribe, i have no idea), but then he sells. He calls HY and Gamuda-we Ms Universe stocks that you must never sell no matter what happens, and he sells. Quite inconsistent.

Thought tbf, Soros was also very inconsistent in terms of what he say, he changes his mind often and his trades can turn in just minutes, and yet his record over the 40 years is exemplary. Some genius can be hard to be explained.

Maybe OTB is a genius and i just don't understand him, but based on the balance of probabilities, its a hard conclusion to make.

Maybe you are right, im just too young :)
02/07/2018 11:29 AM
Choivo Capital Tell me one person who is successfully predicted major macro events consistently.

Its largely irrelevant to me. Though i do have some perspective on it, but i don't let it influence my portfolio that much.

Example, i figured PH the probabilities of PH winning, will be higher than priced into markets, and so my cash holdings went from 0% to 15%, i started collecting cash and getting new investors 3 months before. I figured prices should drop.

Day after election, market didn't drop, for a week it was stable. And then it started dropping, and it wasnt really due to elections, but due to pull back of liquidity around the world for emerging markets.

Right for the wrong reason and the wrong timing.

Seth Klarman, and Howard Marks have been expecting a recession for a long time due to various factors, and they are probably right, their logic and research is very hard to refute, but the timing is the devil in the details, and therefore, they don't really try and predict when it will happen, just a rough idea of where in the economic and credit cycle they're at and invest accordingly.

Being right too early is often indistinguishable from being wrong.


======================================================================
Posted by FamousAmos > Jul 2, 2018 10:49 AM | Report Abuse

do you know where is the 10 years MGB-Tbills spread trading at ? what is the level of dollar index? hows the MSCI emerging market index? oil price? Dow ? Hang Seng ?

By studying the macros you will enhance your portfolio return.

"Rising tide lifts all boats."
02/07/2018 11:35 AM
Choivo Capital Posted by Flintstones > Jul 1, 2018 08:11 PM | Report Abuse

Is Jon really investing other peoples money? I thought all his letters to investors were written to imaginary people.
======================================================================

I invest for a Nigerian prince, Saudi general and handsome man who email me.

The Nigerian prince email me say he got money problem, as me bank in. I really go bank in, and he really is real Nigerian prince with money!

Very lucky man.
02/07/2018 11:37 AM
qqq3 u are not OTB accountant...you don't really know what happened to his portfolio. neither do I and I not interested.

I do know he needs people to believe him because that is the foundation of his business....some thing like Najib actually.
02/07/2018 11:37 AM
Choivo Capital Posted by newbie911 > Jul 1, 2018 10:31 PM | Report Abuse

Mind to know min to join?
And how big is your fund.
Thanks.
======================================================================
Find me on fb, we can talk there.

The fund is small. I want to know if i have alpha first and build a track record before properly raising money. So it will likely remain small for the next 3-4 years.
02/07/2018 11:39 AM
qqq3 some people are suitable for some era.

nothing can convince me OTB is a suitable person for coming years.......
02/07/2018 11:44 AM
FamousAmos you still dont get it. you dont predict. noone can predict. you follow the trend , make concentrated bet and watch your bet closely.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

anyway good luck to you. its always great to see youngsters engage in Bursa instead of some money games.
02/07/2018 3:00 PM
stockmanmy by FamousAmos > Jul 2, 2018 03:00 PM | Report Abuse

you still dont get it. you dont predict. noone can predict. you follow the trend , make concentrated bet and watch your bet closely.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

anyway good luck to you. its always great to see youngsters engage in Bursa instead of some money games.
=============

I guess that answers my question below.....




y qqq3 > Jul 1, 2018 02:41 PM | Report Abuse

should we have big picture before investing and doing asset allocations? and what if our big picture is wrong? why should we have a better big picture than the rest of the market? what makes anyone think he can have a better big picture than the market?

we all want to be accurate but how do we know we will be accurate?
02/07/2018 3:08 PM
godhand otb is a trader la fullstop. how trader makes money?
02/07/2018 3:10 PM
FamousAmos ^ i have been trading for living > 10 years .
02/07/2018 3:11 PM
Whey Whey Hahahahaha
02/07/2018 3:58 PM
Choivo Capital Haha if you've been around that long, you must have some alpha (im assuming your have a good track record here).

I'm not that good at day trading unfortunately. I only trade when i am very certain the EV is really really in my favor.

Before Brexit, i bought put options on the GPB versus the USD as i was pretty sure the odds are more like 50/50, instead of 95/5 which most people seem to think it is.

Before the US elections, i bought put options on the Peso against the RMB, as i was pretty sure that trump had at least 50% chance of winning while the markets was pricing as if he was destined to lose.

And in the latest elections, i bet 2:1 odds that PH would win. Lets say bet of RM1, PH win, i get RM2, PH Lose, i pay RM1.

So far 3/3. Haha really lucky.

I'm considering taking up football or sports bets where the odds are 6 to 1 or higher, as people tend to really badly miscalculate odds at that level. Its very hard to say with confidence someone is going to win only 16% of the time.



===================================================================================
FamousAmos you still dont get it. you dont predict. noone can predict. you follow the trend , make concentrated bet and watch your bet closely.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

anyway good luck to you. its always great to see youngsters engage in Bursa instead of some money games.
02/07/2018 15:00
02/07/2018 7:31 PM
Fabien "The Efficient Capital Allocater" interesting topic. there is really no definitive guideline when come to diversification. my own portfolio construction rule is to own between 12-20 stocks, in stricter terms to have a concentrated portfolio of 15 stocks. having said that, i am currently holding 25 stocks. well, that's my own problem.

it;s just not the numbers really. to protect the downside depends on how you design the portfolio, like stocks chosen should be spread over different industries and the stocks preferably have low correlations, at least to minimse the unsystematic risk.

how much to weight, i would say in direct proportion to how much confidence in each stock. i set my own concentration rule of not more than 20% of portfolio. perhaps im not as confident as Jon. hahaha...
03/07/2018 7:57 PM
Choivo Capital The correlation is one that makes sense and does not make sense to me at the same time. In a recession, correlation for everything goes to 1, all drop together. So i don't really pay attention to diversify in terms of industry, just find really good buys, and often they come from different industries haha.

Haha on the weight, really hard man, on one hand you have warren buffet level of weight, like 40% or more in one (amex,in his younger days), or you have super diversification, like yeoman and walter schloss, which is also not that bad of an idea, shows humility, which usually makes you money, assuming you hold long enough.

But like klarman says, it does not make that much sense if you know what is good and what is bad.

But i think if one has a small fund, say 30k or less. 5 stocks is plenty. Only after you break like 150k, should you start to look a little more.

My limit is 30%. I tend to buy too quickly, even for rce which was build over 8 months. Timecom i built up to initially 40% of fund in just 3 days lol.

But after that, i don't sell or resize, just buy other companies until the largest position fall to like 20% max.

As you can see from my portfolio sizing, where top 2 is 51%, and the rest is like split over 24 companies.

I just can't help a good buy, and there is too many, and so many good buy's are hard to compare against another and say its the cheapest or better one, except for a few.





===================================================================================
Fabien Extraordinaire interesting topic. there is really no definitive guideline when come to diversification. my own portfolio construction rule is to own between 12-20 stocks, in stricter terms to have a concentrated portfolio of 15 stocks. having said that, i am currently holding 25 stocks. well, that's my own problem.

it;s just not the numbers really. to protect the downside depends on how you design the portfolio, like stocks chosen should be spread over different industries and the stocks preferably have low correlations, at least to minimse the unsystematic risk.

how much to weight, i would say in direct proportion to how much confidence in each stock. i set my own concentration rule of not more than 20% of portfolio. perhaps im not as confident as Jon. hahaha...
03/07/2018 19:57
03/07/2018 9:18 PM
Fabien "The Efficient Capital Allocater" yeah, hence i said to minimise the unsystematic risk.

the systematic risk, i.e. the macroeconomy, can only be managed by asset allocation. equities, bonds, structured products, cash...

to certain extent, can managed the portfolio design also during recession times, example building positions in stalwarts, assets plays instead of fast grower and cyclical.

looking back at GFC that was the best time to load up the DLady, Nestle etc. etc.

Posted by Jon Choivo > Jul 3, 2018 09:18 PM | Report Abuse

The correlation is one that makes sense and does not make sense to me at the same time. In a recession, correlation for everything goes to 1, all drop together. So i don't really pay attention to diversify in terms of industry, just find really good buys, and often they come from different industries haha.
03/07/2018 9:45 PM
Choivo Capital GFC? Elections?

I wasnt expecting the run up really. Why would they go up in those times?

And how do you ensure you are being rational instead of rationalizing. That's also a really hard one for me.
03/07/2018 9:47 PM
Junichiro Hi Jon, enlightening reading yr post. Talking abt diversification, from my experience, it would do nothing to protect yr portfolio in a big downturn. In anticipation of a downturn, I just sold all my shares rather than sitting on paper losses.
I did it in 1997 on the start of Asian crisis and continues to do so. Nobody knew it would be that bad. After the Thai Bath was attacked, I sold all my shares considering KLSE is already toppish.
Then , on 2nd Sept 1998, I went into the market buying 50000 shares of only one company. I did not diversify. Some 3 months later, I made a big gain which was far more than I lost when I sold out at the start of the crisis.
03/07/2018 10:22 PM
cheoky otb isnt soros. otb thrive on subcription fee just like icap tan thrive on management fee. when tide come lift it same category as buffet and soros.
03/07/2018 10:33 PM
Choivo Capital Wow, a grizzled warrior here haha.

That was interesting. I'm not sure if you're lucky, or you have an edge.

My mom sold out before every single crisis. Because my dad always wanted to buy just before a crisis. Haha

Tbf, the house price probably dropped during the crisis, but you dont really feel it, since whole family living and using the house, and you dont have a screen and a figure showing you all the way.


======================================================================
Posted by Junichiro > Jul 3, 2018 10:22 PM | Report Abuse

Hi Jon, enlightening reading yr post. Talking abt diversification, from my experience, it would do nothing to protect yr portfolio in a big downturn. In anticipation of a downturn, I just sold all my shares rather than sitting on paper losses.
I did it in 1997 on the start of Asian crisis and continues to do so. Nobody knew it would be that bad. After the Thai Bath was attacked, I sold all my shares considering KLSE is already toppish.
Then , on 2nd Sept 1998, I went into the market buying 50000 shares of only one company. I did not diversify. Some 3 months later, I made a big gain which was far more than I lost when I sold out at the start of the crisis.










If OTB, does the same returns without subscribers and in his own fund, i'll concede he definitely has alpha.

Now, i can argue the only reason his return so strong is not so much his thought process or picks. but his ability to rally people around his stocks.

======================================================================
Posted by cheoky > Jul 3, 2018 10:33 PM | Report Abuse

otb isnt soros. otb thrive on subcription fee just like icap tan thrive on management fee. when tide come lift it same category as buffet and soros.
03/07/2018 10:40 PM
Choivo Capital Junichiro,

What do you find interesting these days, id like to pick your brain a little.
03/07/2018 10:41 PM
hollandking if whole market fall, no point diversifying, where u go, u kena hammer, on contrary, if u focus on a few or less, u have more ammo to defend your position. Opening so many positions means harder to defend unless u want to sell some of the positions and used them to defend the other positions. Focusing means u must be sure counter u choose to focus is solid, no speculative type of counters, no management problem or bad records.
03/07/2018 10:42 PM
hollandking i noticed something was weird since last year, that's why i restructured the whole thing.
03/07/2018 10:43 PM
Choivo Capital "Focusing means u must be sure counter u choose to focus is solid, no speculative type of counters, no management problem or bad records."

Myeg, Ekovest. See what happen.

How do you mean have more ammo? you hold 10% in 10 stocks versus 33% in 3 stocks, eitherway no cash unless you hold cash no?

Im cash is generally very low. so can't "defend", just buy every month depending what cheap.



======================================================================
Posted by hollandking > Jul 3, 2018 10:42 PM | Report Abuse

if whole market fall, no point diversifying, where u go, u kena hammer, on contrary, if u focus on a few or less, u have more ammo to defend your position. Opening so many positions means harder to defend unless u want to sell some of the positions and used them to defend the other positions. Focusing means u must be sure counter u choose to focus is solid, no speculative type of counters, no management problem or bad records.
03/07/2018 10:46 PM
Choivo Capital What did you notice? Care to elaborate? I'm curious.
04/07/2018 1:17 AM
Junichiro Hi Jon, I notice that u have Petron in yr portfolio. What puzzle me is why do u invest big time in a company with little liquidity? Most of the time, the seller is at the mercy at the buyer.

When I was very young, I bought shares in a company which has little trading. When I wanted to sell, I found a big gap between the buyer price n seller price. My senior advised me not to trade in illiquid shares. That was my first lesson.
04/07/2018 11:37 AM
Choivo Capital I look at liquidity as being dynamic.

When you want to sell in a bull market, alot of liquidity. When you want to buy in a bear market, also alot of liquidity. The problem is when you want to buy in bull and sell in bear.

My name is not warren buffet or even kyy. So building up a position or even selling a position is not a difficulty. Small ikan bilis only.

If i have say 30 million to invest, i can definitely see how some companies will take more time than others to build up a position. One of them is petronm. But im small ciku, 10 seconds can build up the position d.

I usually don't sell, and keep my money in the markets permanently, so i dont face your problem.
04/07/2018 11:48 AM
Junichiro "The problem is when you want to buy in bull and sell in bear."

Hi Jon, I got the answer. It is enlightening reading yr postings!
04/07/2018 12:01 PM


 

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