Source: Minority Investments

Should I invest heavily or not?

If you're an “ignorant investor,” Buffett would highly recommend you buy index funds. However, if you are a “value investor,” you should invest heavily, because by definition, the premise of “value investment” is that you have a certain level of understanding of the “value” behind the price. Remember Buffett's card with only 20 holes? You need to be careful and careful to punch every hole, rather than use up all of your life's drilling opportunities in a very short period of time.

I. Questions and answers at the 1996 Berkshire Shareholders' Meeting on diversification

Q:I'm interested in how you view diversification and how you invest centrally. I've studied your annual reports for many years. In some years, you held a lot of negotiable securities in your portfolio, and in 1987, you supported 3 stocks.

...

It seems that for a newly opened stock, your position is never less than 5% or higher than 10% of your overall holdings. I wonder if my conclusion is correct?

Buffett:This is definitely not true. Some of our holdings you can't get from the annual report because our latest annual report only lists stocks with a market value of over 600 million US dollars. Obviously, stock positions not listed will be even smaller.Sometimes, this is because the companies not listed here are small companies, and we can't buy enough shares; sometimes it's because after we (initially) bought a company, the company's stock price went up; sometimes it's even because we were selling shares in some companies.So, there's no place for magic (this part of the open position). And this brings us back to your question about “diversification”.

In our opinion,For people who really know what they are doing, there is very little practical significance in terms of diversification.

Decentralization is to prevent ignorance.I mean, if you want to protect yourself from being beaten by the market, you buy all the stocks, and there's nothing wrong with that. It's a perfect and effective strategy for people who don't know how to analyze a business.

And for people who know how to analyze and evaluate companies, owning 50, 40, or 30 stocks is simply insane. Because there simply aren't so many excellent companies, and it's impossible for a single human being to understand so many companies. However,If you have a super good business, but at the same time you invest money into companies ranked 30th and 35th on the appeal list, this approach seems insane to Charlie and me.

This (decentralization) is the traditional approach. If all you have to do is reach average, this practice might keep you in your job. butIn our opinion, (decentralization) is actually an admission that you don't understand the business you own.

In terms of my personal portfolio, I actually only own 1 stock (Berkshire), but I understand this one. It made me feel very comfortable. Do I need to hold 28 stocks to achieve “moderate diversification”? That would be pretty ridiculous.

Within the Berkshire Group, I can select 3 businesses, and I would be very happy if we only owned these 3 businesses (or subsidiaries) and all of my money was in Berkshire. I love the reality that we can find more good companies. We can keep adding good businesses, but 3 excellent companies are enough for you to reap good rewards in a lifetime.

Moreover, in fact, on average, one person can't even find 3 families. If you look at how this country's wealth is formed, they don't rely on a portfolio of 50 stocks to seize wealth; they rely on identifying an excellent company. Coca Cola is a famous example, and many people get their wealth from it.

Also (the problem is) there aren't 50 Coca Cola companies in the world; in fact, there aren't even 20.If there were 20 companies, that would be great. We could go crazy and diversify investments in them and then get a return exactly equal to that real Coca Cola company.

But actually, youCan't find so many homes; and in fact, youNor do you need that many homes. A truly excellent enterprise can be well protected even after a long period of economic change and competition. I'm talking about the kind of enterprise that can withstand strong competitors. Three such companies would be far better than 100 mediocre ones.

Also, it's safer to have 3 such companies. I mean,The actual risk of owning 3 easily identifiable good companies is far less than owning 50 well-known large companies.

I was shocked by the finance class teaching people how to diversify their investments.

If I had to bet on the financial resources my family would depend on for the next 30 years, I'd rather pick 3 out of my portfolio than diversify my investment into 50 businesses.

Does Charlie have anything to add?

Munger:What he (Buffett) wanted to say is that many of the things taught in modern investment courses arenonsense!(Oh, you can see Munger smiling and shaking his head proudly ~)

Buffett:Giggle, would you like to go into more detail?

Munger:You can't trust this stuff... modern portfolio theory...

Buffett:It doesn't come in handy. It can teach you how to get an average income, but I think any fifth-grader can figure out how to get an average income.

(Assembly theory) The description is more detailed, includes a lot of Greek letters (difficult concepts), and adds a lot of stuff that makes you think you've entered the advanced game, but there's really no added value.

Munger:I'm very perplexed by modern portfolio theory because I'm learning insanity in a sense (learning rationality from others' irrationality).

Buffett:Haha, we hang out together a lot (learn how to be insane). (irony)

Munger:I usually use some theoretical models to classify insanity (irrational). But I've found that I can't even classify modern portfolio theory.

It contains some really weird stuff.

Buffett (summary):If you find 3 very good businesses, you'll become very rich. If you understand them, nothing bad will happen to 3 of them; this is their characteristic.

Munger:By the way, if you really understand what Buffett said, you can complete this course in 1 week, which is probably why (modern portfolio theory) is so insane.

Buffett:Then there is no difference between high priests and civilians.

II. 2017 Daily Journal Shareholders' Meeting: Uncle Hawes's Fables

Q:My question is about your speech for “The Foundation of Financial Officers” (The Foundation of Financial Officers) in California in 1998. In that speech, you criticized the complexity and high cost of many foundation portfolios, and you clearly stated,“It would be safe and rich enough to invest all of the Foundation's funds in three excellent domestic companies over a long period of time.” Take the Wicker Foundation and Coca Cola for example. So if you now have a $1 billion foundation, would investing in just 3 stocks make you comfortable?

Munger:I'll revise your question. Does a non-diversified portfolio make me comfortable?

The Munger Foundation holds three stocks. Part of it is Berkshire, another part is Costco (Costco), another part is Li Lu's fund, and the rest is just a few fragmented positions. Am I comfortable? Is the mix safe and rich enough? I'm very comfortable. My portfolio doesn't include many stocks, and it doesn't include many stock names. Can anyone else feel as comfortable as me? Many of the stocks in the big portfolio won't be well understood by either holders or investors. Their results would be better if they did as I did. Are three stocks enough? How likely is Costco to fail? How likely is Berkshire Hathaway to fail? How likely is Li Lu's investment portfolio in China to fail? There is almost zero chance that any of them will fail. So what is the possibility that all three of them will fail?

It's a great idea I had when I was young. When I was a lawyer and began investing with my meager savings, I tried to figure out how diversified my portfolio should be if I wanted to outperform the market by 10% each year. I solved this problem, I didn't use any formula, I calculated it using high school algebra. Also, I realized that if I had invested for 30 to 40 years, my portfolio never had more than 3 stocks, and my average holding period was 3 to 4 years, there was a 99% chance that I would do a good job. From the moment I calculated this result with my little pencil, I never believed their nonsense for a second. Why diversify? Diversification is for those who don't understand anything. Buffett called them “investors who know nothing.”If you're a “ignorant investor,” you'll reach an average level (through a diversified approach).However, if you're not an ignorant investor, if you really have the power to find a more effective method, 3 is enough; choosing 50 stocks would hurt yields instead.?$#@$ him, 1 is enough. If you've found 1 definite opportunity, why would you need anything else?

We pay these professors to have thesenonsenseTeach young people. The problem with corporate finance courses is that these people get paid for their nonsense. This (course) helps you because you know they're talking nonsense, but others believe these people's nonsense (then you can outperform the market more easily).

If you have an Uncle Hawes, his business is very safe and strong.He tells you that as long as you go to work for his company, he will leave everything in the company to you.You don't need any diversification.You don't need any guidance from a corporate finance professor; you should work for Uncle Horace. That's for sure, you just need a definite chance! Sometimes the market gives you the same chance as Uncle Horace. When an opportunity like this presents itself,Find a large frying pan and walk to the front of the pie cart. A pie truck like this doesn't happen very often. When an opportunity like this presents itself, you must have the determination and courage to seize it.I was lucky enough to learn this from my late great-grandfather at a very young age. I've spent my whole life hanging out with dead people. They are far superior to most people living on Earth today. You can learn a lot from those who have died. If you just reach for a book, you can communicate with the deceased. Communicating with them is easy, and there are no communication barriers. So I highly recommend that you make friends with people who have died; it has helped me a lot.

...

When you find those few opportunities, you must act aggressively. That's the Munger way.

I learned this indirectly from someone I haven't been masked before. He's my mom's grandfather. He was an Iowa pioneer who participated in the Black Hawk War (the war that moved the Indians west). After some huge setbacks, he eventually became the richest person in town, and he owned industries such as banking. My mom knows him because she's been to his home in Algona, Iowa, the big house in the center of town, iron fences, spacious lawns, and large barns. My great-grandfather Ingham taught my mother this way in her old age, “You only have a few opportunities in your life.” It was only a few opportunities that allowed him to make his family rich. When Iowa's black land was cheap, this guy took over Iowa's farmland. Every time there was a panic, he bought a few farms and rented them out to thrifty Germans. Renting a farm to a German in Iowa is a no-lose deal. butHe has only seized a few opportunities, and I'm afraid this is the case in the real world... you won't have a million brilliant ideas.

3. Mount Everest

“At the end of 1951, I still invested about 75% of my assets in GEICO.”

Beginning in November 1958, Buffett invested 1/3 of the partnership's assets in Sanborn Maps.

By November 1964, Buffett's partnership owned more than $4.3 million in Express shares. It also made big bets on two other companies: Texas Gulf Manufacturing Company, $4.6 million, and Pure Petroleum, $3.5 million, both of which are “cigarette butts.” These three investments already account for more than half of the total portfolio. By 1965, investment in Express alone accounted for 1/3.

When the partnership was founded in 1962, it had only $7.2 million in capital. Buffett was not at all afraid of increasing his positions. He kept buying shares of Express, and by 1966 he had already spent 13 million US dollars on these stocks. He felt that partners should understand a new “basic rule”: “We are far from diversifying our investments like most investment institutions. We may invest up to 40% of our net asset value in a single stock, and this is based on two conditions: our facts and reasoning are highly likely to be correct, and the possibility of any significant change in the potential value of the investment is minimal.”

Omelette: If a single stock cannot exceed 25% of the position requirement under the new private equity regulations, Buffett will probably face charges from the Fund Industry Association or the Securities Regulatory Commission for the vast majority of his private equity career.

Entering the Berkshire era, Buffett's strategy was actually only more aggressive, not conservative. If in the private equity era, Buffett still had a general structure for the overall portfolio, in the Berkshire era, Buffett's investment had only one strategy: buy it, you can't buy it again.

That is, either they have already bought 100% of the shares (Berkshire, Nebraska Furniture Store, Boxian Jewelry, Heisei, Fei'an, etc., etc.), or the seller refuses to sell them (Buffett's holdings can only increase by 1 percentage point and 1 percentage point in the Berkshire Energy Company's acquisition), or the price exceeds Buffett's psychological price level after the purchase, such as Western Petroleum:

4. So what is a value investment strategy?

In the eyes of Buffett and Munger, there is actually no such thing as a “heavy position” at all.

All they did was seize the few opportunities in front of them at any cost.

My opinion is more extreme. I think in some cases, a family or fund using 90% of their assets to invest in a stock is a rational choice. In fact, I would like the Munger family to generally follow this investment line. Furthermore, I found that up to now, 90% of the Woodruff Foundation's assets are still in the Coca Cola shares originally offered by its founder, which has proven to be a very wise approach.

—— “Poor Charlie's Collection: Charlie Munger's Wisdom Proverbs”

edit/lambor