Source: Red and Green As centralized investors, our goal is to have a greater understanding of our companies than any Wall Street investor. If we are willing to work hard and learn as much as possible about our companies, we are likely to know more than general investors, which is all we need to gain a competitive advantage. On the product structure side, the operating income of products worth 10-30 billion yuan is 401/1288/60 million yuan, respectively, in 2023, the overall sales volume of the company reached 18,000 kiloliters, a year-on-year increase of 28.10%, showing significant growth.

Epigraph: Choose a few stocks that can generate higher-than-average returns in long-term tug-of-wars, concentrate most of your capital on these stocks, and hold them firmly to win steadily.

'The Warren Buffet Portfolio' was created in 1999. This is not a sequel to Robert Hagstrom's first work, 'The Warren Buffet Way', but a sister work. If 'The Warren Buffet Way' provides us with a tool to choose common stocks, 'The Warren Buffet Portfolio' teaches us how to combine these stocks and provides a broad knowledge framework for managing them.

Hagstrom previously co-managed the Legg Mason Trust Fund with Bill Miller and Michael Mobusen. He adhered to the basic principles in 'The Warren Buffet Way', which was encouraging. He also learned mathematics, probability, complex adaptive science and concentrated investment strategies from Buffet, Munger, Miller and mathematician Eddie Sumpo. The 'concentrated investment strategy' became the theme of 'The Warren Buffet Portfolio'.

1. Strategic Thinking on Concentrated Investment

Although concentrated investment is a simple idea, it is rooted in a set of complex and interrelated concepts. This idea runs counter to conventional thinking methods. The essence of concentrated investment can be briefly summarized as follows: choose a few stocks that can generate higher-than-average returns in long-term tug-of-wars, concentrate most of your capital on these stocks, and hold them firmly to win steadily.

Concentrated investment was born against the background of the popularity of active investment and index investment. Active investment frequently buys and sells, constantly changing investment portfolios, hoping to profit from predictions. Index investment collects and holds various common stocks and creatively designs investment portfolios that closely track the S&P 500 index. Buffet appreciates index investment, believing that it is most suitable for novice investors, but he has opened up a third option, the concentrated investment strategy. The core of concentrated investment is to concentrate your investment on the few companies that are most likely to produce higher-than-average performance.

Buffet's concentrated investment strategy is inspired by the great economist John Menard Keynes and the 'Father of Growth Stocks' Philip Fisher. Keynes once said that he was confident in only two or three companies he invested in. Fisher restricted his capital to fewer than ten companies, with 75% of his investments focused on three or four companies. They always prefer to invest in a few outstanding companies they know very well rather than numerous companies they do not understand. They believe that buying stocks in companies they do not understand may be much more dangerous than not being sufficiently diversified. Especially Fisher, his influence on Buffet was huge. Fisher firmly believes that when encountering excellent opportunities that are within reach but not within grasp, the only rational way is to invest heavily. Moreover, the best stocks are always very difficult to find, and once found, they must be focused on investment. This means that 'less is more'. In response, Buffet actively advocated: for every investment you make, you should have the courage and confidence to invest more than 10% of your net assets in this stock. When Buffet bought American Express in 1963, he invested $13 million, 40% of the company's assets, in this excellent stock, which accounted for 5% of the company's stock at that time. In the next two years, the American Express stock tripled and the partnership company in which Buffet belonged earned a profit of $20 million.

Concentrated investment is a refutation of the widely diversified and high-turnover strategy. Among all active investment strategies, only concentrated investment has the best chance of long-term performance above the general index, but it requires investors to be extremely patient. What is 'long-term'? Hagstrom offers an experiential rule: set the turnover rate of funds between 10% and 20%. A turnover rate of 10% means holding shares for 10 years; a turnover rate of 20% means holding shares for 5 years.

Concentrated investment seeks returns higher than the average level. From academic research and practical case analysis, there is ample evidence that the pursuit of concentrated investment is successful. However, on the journey of pursuit, it is full of bumps, and concentrated investors must endure this turbulence, because they know that in the long run, the economic benefits of the companies they hold will compensate for any short-term price fluctuations. Charlie Munger's view is consistent with Buffet's: 'As early as the 1960s, I actually rely on compound interest tables to make various assumptions about the performance of common stocks to find out what advantages I can have.' His conclusion was that owning three stocks is enough as long as you can withstand price fluctuations.

Concentrated investment is a simple concept that draws on the essence of logic, mathematics, and psychology that are related to each other. Using Buffett's investment strategy, choose several companies that have had higher investment returns than the general level in the past and bet most of the funds on the stocks with the highest probability. As long as things don't get too bad, keep the equity intact for at least 5 years, and exceed it better.

To Hagstron, concentrated investment is defined as a "culture" that is built on several patterns of "narrow culture". These patterns include behavioral patterns in psychology, probability theory in statistics, and the principle of complex adaptation. By combining these principles and using them for the same purpose, it is called "grid thinking". When Buffett summarized the experience accumulated by Berkshire Hathaway, he described his company as an "educational company that teaches people the correct way of thinking through the practical application of some important concepts". It contains eternal truths: basic common sense, basic fear, and basic human analysis, which allow them to predict human behavior. If you can do the above and follow some basic principles, you will do well in investment.

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To verify the effectiveness of concentrated investment, Hagstron used a computer statistical database of common stock investment returns, separated 1,200 companies that showed measurable data, including total revenue, net earnings, and return on assets. The deadline for obtaining data is from 1979 to 1986. Let the computer randomly combine to form 12,000 investment portfolios of different sizes from these 1,200 companies. Then, calculate the average annual return rate of each type of investment portfolio and calculate it according to 10 and 18 years. Compare the returns of the four different investment portfolios with the same period of the S&P 500 index, and draw a key conclusion: in any case, reducing the number of stocks in the investment portfolio will increase the possibility of obtaining higher returns than the market.

① 3,000 groups of investment portfolios including 250 stocks;

② 3,000 groups of investment portfolios including 100 stocks;

③ 3,000 groups of investment portfolios including 50 stocks;

④ 3,000 groups of investment portfolios including 15 stocks.

Then, calculate the average annual return rate of each type of investment portfolio and calculate it according to 10 and 18 years. Compare the returns of the four different investment portfolios with the same period of the S&P 500 index, and draw a key conclusion: in any case, reducing the number of stocks in the investment portfolio will increase the possibility of obtaining higher returns than the market.

When observing the minimum number of stock groups/maximum number of stock groups-the worst and best performance in each group, it can be found:

① In the investment portfolio of 250 stocks, the highest return rate is 16.0%, and the highest and lowest returns account for 11.4%;

② In the investment portfolio of 100 stocks, the highest return rate is 18.3%, and the lowest return rate is 10.0%;

③ In the investment portfolio of 50 stocks, the best return rate is 19.1%, while the worst return rate is 8.6%;

④ In the investment portfolio of 15 stocks, the best return rate is 26.6%, while the worst return rate is 4.4%. This group is the concentrated investment portfolio in the study, and only this group's best return rate exceeds the S&P 500 index.

The same trend was found in the long-term (i.e., 18-year period). Portfolios with a small number of securities produced higher or lower returns than portfolios with a large number of securities. These results lead to two important conclusions:

First, by having a concentrated investment portfolio, you will have a greater chance of beating the market;

Second, by having a concentrated investment portfolio, you will have a greater chance of losing to the market.

To deepen the impact of the first conclusion on skeptics, Hagstron found that there are some important statistical conclusions in 10-year data:

① Among the 3,000 15-stock investment portfolios, 808 beat the market;

② Among the 3,000 50-stock investment portfolios, 549 beat the market;

In an investment portfolio of 3,000 types of 100 stocks, there are 337 investment portfolios that beat the market;

In an investment portfolio of 3,000 types of 250 stocks, there are 63 investment portfolios that beat the market.

The fourth conclusion serves as strong evidence to prove that the less number of securities you hold, the more likely you will beat the market. Holding 15 stocks gives you a chance of 4:1 to beat the market while holding 250 stocks gives you a chance of 50:1. On the other hand, the second conclusion emphasizes the importance of selecting good stocks wisely. All the super investors listed by Buffett, such as John Maynard Keynes, Charlie Munger, Bill Ruane, and Lou Simpson, are all excellent stock pickers. If you don't buy the right company stocks at the right time, your poor performance will also be very noticeable. However, Hagströmer thinks that the super returns earned by these super investors are entirely due to their willingness to concentrate their securities on the best creative investment portfolios. They concentrate on a few rare good stocks, build their investment portfolio around them, and buy these stocks at a price significantly lower than the estimated market value. Their shared belief is that buying stocks with high safety margin coefficients reduces risk.

However, even though they try to implement a concentrated investment strategy, super investors have all experienced periods of poor short-term performance. John Maynard Keynes’ performance was below the market average for 1/3 of the 18 years he operated the Chester Fund. In the first three years he oversaw the Fund, his performance was 18 percentage points lower than the market performance. Ruane's Sequoia Fund had performance below the S&P 500 index for four consecutive years in the 1970s. In 1974, the Sequoia Fund fell behind the market by 36 percentage points. Munger's partnership has a 36% loss rate during his 16-year tenure, including a 37% market lag from 1972 to 1974. Four of Simpson's 17 years as head of the Government Employment Insurance Company saw below-market performance, accounting for 24% of total years. In the short term, their performance was indeed bad.

3. It is necessary to hold stocks for a long enough time.

Super investors listed by Buffett, such as John Maynard Keynes, Charlie Munger, Bill Ruane, and Lou Simpson, basically adopt a concentration investment strategy. They are all around those who consistently beat the market for a long time, not relying on luck, but on following the basic principles set by one person, that person is Benjamin Graham. They have a common connected strategy, which is to take full advantage of the difference between the market price of a company and its intrinsic value. They focus on a few rare good stocks, build their investment portfolio around them, and buy these stocks at a price significantly lower than the estimated market value. Their shared belief is that buying stocks with high safety margin coefficients reduces risk.

However, even though they tried to implement a concentrated investment strategy, super investors all went through periods of low short-term performance. John Maynard Keynes' performance was below the market average for 1/3 of 18 years operating the Chester Fund. In the first three years he oversaw the Fund, his performance was 18% lower than the market performance. Ruane's Sequoia Fund had performance below the S&P 500 index for four consecutive years in the 1970s. In 1974, the Sequoia Fund fell behind the market by 36 percentage points. Munger's partnership has a 36% loss rate during his 16-year tenure, including a 37% market lag from 1972 to 1974. Four of Simpson's 17 years as head of the Government Employment Insurance Company saw below-market performance, accounting for 24% of total years. In the short term, their performance was indeed bad.

Hagströmer used the data of several groups of 1,200 companies established in the laboratory to see the relationship between enterprise earnings and stock prices at different stages. When deciding the degree of correlation between enterprise earnings and stock prices, Hagströmer found that the longer the time, the greater the correlation:

1. When holding stocks for 3 years, the correlation coefficient ranges from 0.131 to 0.360 (a correlation coefficient of 0.360 means that 36% of the price variance is explained by the return variance);

2. When holding stocks for 5 years, the correlation coefficient ranges from 0.374 to 0.599;

3. When holding stocks for 10 years, the correlation coefficient increases to 0.593 to 0.695;

4. When holding stocks for 18 years, the correlation coefficient between earnings and stock prices reaches 0.688 - with a significant correlation.

This verifies Buffett's argument that if the time is long enough, a company that performs well economically will produce strong stocks. Although the increasing correlation between earnings and stock prices over time is not always predictable, as Buffett said, from a long-term perspective, market value and enterprise value are parallel. However, the relationship between them in a single year may be mysterious. Benjamin Graham pointed out long ago that as long as the intrinsic value of a company grows at a satisfactory rate, it does not matter whether it is recognized at the same rate as its success. In fact, it is a good thing if others recognize its success later, as it can leave us with the opportunity to buy high-quality stocks at a lower price.

Concentrated investment must be a long-term investment. Buffett's ideal holding period is "forever" - as long as the enterprise continues to produce economic benefits above average, and the management can rationally allocate the company's earnings, holding only that stock is worthwhile. Buffett's warning tells us to sell a bad company if we own it, as discarding it allows us to own a better company in the long run. But if we have a good company, we should not sell it. The sluggish investment management strategy, like the koala, can increase capital above average levels and has two other economic benefits: 1. It reduces transaction costs. 2. It increases after-tax profits. Each economic benefit is valuable, and the combination of the two benefits is incomparable.

A study has shown that when the turnover rate reaches 25%, 80% of the taxes generated by securities investment are equivalent to the taxes generated when the turnover rate reaches 100%. Its conclusion is that when you invest in a low turnover rate, you should pay significant attention to it, instead of only paying attention to it when the turnover rate is high. In order to maintain high post-tax returns, investors must keep their average annual investment turnover rate between 0% and 20%. What kind of strategy is helpful in maintaining a low turnover rate? One viable method is the index fund strategy, and another is the concentrated investment strategy. A low turnover rate means low trading costs, while a concentrated investment strategy gives you the maximum opportunity to compound unrealized capital profits into incremental profits.

4. Bet big when you have the advantage.

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Seth Klarman, a famous value investor, believes that to reduce the portfolio risk to an acceptable level, it is not necessary to hold too many stocks. Usually, holding 10 to 15 stocks is sufficient. Graham proposed the principle of limited diversification. The smallest combination should include 10 stocks, and the largest should include 30. Buffett said that if he had $50 million, $100 million, or $200 million to play with, he would concentrate 80% of the funds in five stocks and invest 25% of the funds on the one being redeployed.

The necessity of concentrated investment is directly related to the Pareto distribution law. According to this law, a small number of companies will greatly exceed all other companies. In a good investment portfolio, each company must truly have the potential to achieve great success. According to Pareto distribution law, the most distinctive companies are unique, and one company will beat all other companies. Therefore, it is not necessary to hold too many company stocks, three to five companies are enough. The more diversified the investment portfolio is, the more inclined its return performance is to the average market return. By concentrating investments highly on a few companies that meet investment standards and wisely taking risks when the risk-return ratio is favorable, there is an opportunity to achieve high returns.

Munger is an advocate of concentrated investment. In his own stock asset account, there are only three stocks, with a market cap of over $2 billion. Munger believes that there is almost no possibility of failure in one of these three, and almost no possibility of failure in all three at the same time. Diversified investment is for those who don't know anything. By definition, it can only get average returns. Diversified investment will only distract you, therefore, it is better to focus on attacking a few high-quality enterprises with a heavy hammer. This will allow you to gain high profits on the road to wealth creation.

5. Consider three basic principles.

Buffett's investment strategy has remained almost unchanged for a long time. He always considers choosing companies, management conditions of companies, financial performance, and current market prices in order. With this, he developed three basic principles that he has always been thinking about.

①Think about how to evaluate a company with market principles. Buffett uses John Burr Williams' discounted cash flow method to evaluate the intrinsic value of a company.

②Think about whether or not to use economic value added based on financial principles. Buffett's clear answer is "no". As he said, he does not need economic value added to tell him that Coca-Cola has appreciated again.

③Think about whether managers can be evaluated according to management principles. Buffett's highest praise for a company manager is that the company manager inevitably displays the spirit of being a company owner and thinks what the company thinks. Otherwise, one should not invest.

Concentrated investment and long-term investment are not easy and difficult to achieve. Therefore, Haggstrom suggests that the books "Buffett's Way" and "Buffett's Investment Portfolio" be put together as a guide for investors. If we are ready to fasten the seatbelt of concentrated investment, Haggstrom offers us the following advice:

①Don't enter the stock market unless you are willing to treat stocks as part of the ownership of the company and always think of them that way.

②Prepare to study your own business and your competitors, and you should know more about it than anyone else.

③Do not implement a concentrated investment strategy unless you plan to invest for more than 5 years. A long investment period will increase the security of your investment.

④Remember never to use borrowed money for concentrated investment. A concentrated investment without relying on debt will enable you to achieve your goals as quickly as possible.

⑤Controlling concentrated investment requires the right mentality and character. Investors need to meet this demand; otherwise, do not implement a concentrated investment strategy.

As a concentrated investor, our goal is to know more about our company than all Wall Street investors. If we are willing to work hard and learn as much as possible about our company, we are likely to know more about it than the average investor, and this is all we need to gain a competitive advantage.

Winners have their own strategies. Buffett once said that his investment strategy is not beyond the understanding of serious investors. But it does take time to study. "Investing is easier than you think, but harder than it looks." Successful investors don't need to learn high-level mathematics full of Greek symbols, learn to decode derivative tools, understand the fluctuations of international currencies, and certainly don't need to understand the policy of the Federal Reserve. Of course, they don't need to follow the daily cliché of market trend forecasters.

Editor / jayden