samedi 30 janvier 2021

Observations about so-called good investors

These days, I'm reading investment letters from so-called serious investors and professional firms. And it's almost funny too see how much people do rookie mistakes sometimes. 

First of all, I don't understand why some people have such a concentrated portfolio. For instance, how safe is it to hold only 4 or 5 stocks if you have a big portfolio? (Of course, if you have a small 50K$ portfolio, it would not be intelligent to hold a lot of stocks, but if it's way bigger, like 200K$ or more, I think that you need much more diversification). When you own only 4 stocks, if one or two of your stocks do bad, something like 50% of the portfolio is affected. 

We sometimes see people being overconfident, almost arrogant, about their stocks. It's not normal. Stocks are not our kids or our lovers. I like my stocks for now, but I may very well stop liking them tomorrow, which won't probably be the case with my kids. 

Also, I've seen some people talking about how macroeconomics hurted them during the last year. For instance, some people thought that the low interest rates couldn't go lower, so they invested in stocks that could only go benefit from a rise of rates. But, guess what. They got it in the ass because the rates continued to drop. Yeah, they got a big fat black vascularized dick in the anus and it hurted. 

Things can always go worse or better, whatever the state we're in, even if it looks like the basement level. Who thought in march 2020 that the pandemic would be as bad today as it was 11 months ago? Almost nobody. A month ago, when vaccines came out, everybody was excited, girls were wet, boys got a boner. At last, we would go out and meet people and drink and snort coke and fuck behind the dumpster. 

But no. Coronavirus is still there. And he's smart because he mutated. Just like in the movies or in that good little game I had on my Iphone a few years ago. And now, the virus is even more contagious. And borders are closing once again. 

These mistakes (over-concentration and macro-economics hypothesis) were commited by people who look like they believe a lot in their own opinions. You should always doubt about everything, including yourself. 

A portfolio should resist to most of the angles of any possible story. If not, make adjustments to your portfolio. And don't forget that any CEO may be a possible drug lord who's laundering money with his company.  

Having one drug lord among your 4 companies is very possible. Having 5 drug lords among your 20 companies is still possible, but less. 

12 commentaires:

  1. I humbly disagree about your views on diversification...

    The key for me is to know what I own (management, business model, industry), so I think its important not own too many stocks...

    I lifted the following out of my own blog from a few years ago as a counter-argument (based on Joel Greenblatt's take on the subject).

    'In a world where ETFs with 50 positions are considered “concentrated”, Joel’s definition of “concentrated” is wildly different than the mainstream view. The mainstream view is that “risk” is volatility of returns and “risk” can be reduced by holding more positions. Joel suggests that as few as 8 stocks in different industries is sufficient to properly diversify a portfolio.

    8 stocks would result in so much volatility that it would be career suicide for any professional investor. Most people can’t handle volatility. A small investor with the right temperament can. Unfortunately, most small investors squander this advantage. We’re never going to beat Wall Street at their own game: namely, smoothing out returns and reducing volatility (i.e., pain) with fancy financial engineering...

    Most of the volatility is meaningfully reduced with a handful of positions. Joel offers a caveat, however, and suggests that if you are going to run a concentrated portfolio, it is best to diversify among a group of different industries.'...

    I've really improved my investing performance once I paired down my portfolio, and my best performers have come from my most concentrated positions.

    But that's just the way I see things...every investor will have decide for himself how he is going to handle the subject of diversification.

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    1. Even if I think I know how to find a great company, 8 stocks is not enough for me. Because you may very well do bad with 2 or 3 of these stocks and the impact on your portfolio will be important.

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  2. I think it is almost as easy to find 20 great companies in the US market than to find 8. Around 20 stocks is recognized as a sufficient diversification as many savvy investors would say. With 8 stocks, your biggest position is probably around 15-20%, if that one goes wrong it represent a big chunck of your portfolio. But I definitively agree that the individual investor does not have time and ressources to find and follow 50+ stocks.

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    1. I agree with you. I’m not sure that 20 stocks is the absolute number to aim, but I wouldn’t go under 15 stocks.

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  3. 20 stocks for under 5M works well. Monish Pabrai, I dont understand...risky!

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  4. Ce commentaire a été supprimé par l'auteur.

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    1. Me semble que j’ai écrit exactement ça dans mon texte?

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  5. Exactement hehe ! Faut croire que je m'étais perdu avec l'anglais!

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  6. I have about 25 stocks, 25% US and 75% Canadian(most of which do business in the US). I am up 29.5% in my TFSA fro 2020. Not bad, right penetrator?

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  7. Hey penetrator I can't wait to see your ex boyfriend Jason Donville on Bloomberg(BNN) soon!!!!!!! Maybe he can recommend Valeant(Bausch) pharmaceuticals so we can lose not only our shirts but also our pants!

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    1. Wasn’t he supposed to be on BNN last fall? Some people (maybe you) wrote that in the comment section.

      I think you shouldn’t expect that soon.

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  8. Only owning 5 stocks feels risky but maybe it isn't. How many strong companies end up going to shit in a short amount of time? Late in 2019, some guy told me he only owned Facebook, Twitter, Square, Apple and Netflix. They weren't small positions either. But why only own 5 if you don't have to.

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