Concentrated Investing by Allen Benello, Michael Van Biema and Tobias Carlisle

Concentrated investing book

Concentrated Investing: Strategies of the worlds`s greatest concentrated value investors takes us into the select group of history`s value investors strategies on how they went about concentrated portfolios successfully. Concentrated investing as the name suggests is about managing a portfolio of a small group of undervalued stocks and holding them for long terms. The book emphasizes the fact that diversification beyond a point adds no value in terms of portfolio returns.

Tobias Carlisle has written 2 other successful value investing books called “Quantitative Value” and “Deep Value”. In concentrated investing book, authors examine some of the methods elite investors like Charlie Munger, Lou Simpson, Warrant Buffett, John Maynard Keynes, Kristian Siem have deployed to accomplish their stellar returns. There are separate chapters on

  1. First chapter on Lou Simpson the man Warren Buffett has described as “one of the investment greats” who ran the Geico`s investment portfolio successfully. Geico`s inherent competitive advantage was its rock bottom operating costs and ever growing insurance float. Simpson took those big bets only when he thought the odds were well in his favor. He regards Geico`s single best winner as Federal Home Loan Mortgage known as “Freddie Mac” and rightly sold in 2005 before the 2008 financial crisis after holding it for 20+ long years. Simpson was head of investments for GEICO for 31 years and the average annual gain from 1980-2004 was a whopping 20.3%. There is a session on this chapter titled “Simpson, The Value investor” which details out his investment philosophy. At high level they are
  1. Think Independently against the conventional wisdom and irrational behavior of the crowd
  2. Invest in high return businesses run for the shareholders which appear to sustain above average profitability and positive free cash flow
  3. Pay only a reasonable price, even for an excellent business
  4. Invest for the long term and stop attempting to guess short term swings of the market which are always unpredictable. Furthermore moving in and out of stocks frequently has 2 major disadvantages that will substantially diminish results: Transaction costs and Taxes
  5. Do not diversify excessively. Too much diversification will yield average returns close to market returns. Good investment ideas are difficult to find. When you find one, make a large commitment.

His clairvoyance in buying Nike considering that they were yet to penetrate into large nations like China and India was a great read and learning for me.

  1. Second chapter on John Maynard Keynes the british economist who faced the 1930 depression when he was 47. Through this period, John Maynard Keynes, the british economist`s ideas formed the basis for so called “Keynesian economics”. Like Benjamin Graham whom Warren Buffet calls as his Guru, Keynes too made a distinction between speculation and investment in his magnum opus writing called “The General Theory of employment, Interest and Money” published in 1936. Buffett embraced Keynes`s philosophy and quoted his brilliance from a letter Keynes wrote to a business associate named Francis Scott in 1934. Buffett who was endeavoring to describe his own investment philosophy, held that Keynes`s letter says it all:The best point in his writings are below and I feel its so apt even today:
  2. I don’t believe that selling at very low prices is a remedy for having failed to sell at high ones. As soon as prices had fallen below a reasonable estimate of intrinsic value and long-period probabilities, there was nothing more to be done. It was too late to remedy any defects in previous policy, and the right course was to stand pretty well where one was.
  3. As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes”
  4. I didn’t find anything worth highlighting in chapter 3 about Kelly, Shannon and Thorp on the mathematical investment philosophies. The Kelly`s formula, betting probabilities seemed too mathematical for me to digest and correlate to investing methodologies. The story about Buffett`s heavy positioning during Amex Oil scandal is refreshing.
  5. Chapter 4 talks about Charlie Munger`s concentrated investing philosophy which was very interesting about his and Buffet`s initial days acquiring Blue Chip stamps, Sees candies etc. As Munger succinctly puts it about investing “ The trick is to get more quality than you pay for in price. Its just that simple”. Munger follows a strategy of owning very few securities which might be even 3 stocks portfolio. He says very aptly about investment management business that its not a good way to run an investment management business because if you only own 2 stocks and you hold them forever and they do well, your client will think “Why the hell am I paying this guy?” Well, pretty soon he falls in love with the sticks when he`s tripled his money and quadrupled his money and so on. It doesn’t look like you are doing anything.
  6. The chapter on Charlie Munger ends with a Rudyard Kipling poem IF which includes the following lines unusually apt for concentrated value investors.
  7. There are 3 chapters on Kristian Siem, Rosenfield from Grinnell college which focused on concentration and Glenn Greenberg who was more of an active investor with companies.

I really liked how Jason Zweig distilled Rosenfield`s investment principles down to three

  1. Do a few things well: Rosenfield built a billion-dollar portfolio not by putting a little bit of money into everything that looked good but by putting lots of money into a few things that looked great. Likewise if you find a few investments that you understand truly well, buy them by the bucketful
  2. Sit still: Patience – Measured not just in years but in decades—is an investor`s single most powerful weapon. Witness Rosenfield`s fortitude: In 1990, right after he bought Feddie Mac, the stock dropped 27%– and Grinnell`s total endowment shriveled by a third. And although Sequoia crushed the S&P 500 cumulatively from 1979 to 1998, the fund underperformed the index in eight of those years, or 40% of the time…Rosenfield never panicked
  3. Invest for a reason: Rosenfield is a living reminder that wealth is a means to an end, not an end in itself. His only child died in 1962 and his wife died in 1977. He has given much of his life and all of his fortune to Grinell College.

 

And the last chapter concludes really well with so much of wisdom collated from all of these great investors. It really communicates to the readers that to be a successful investor, one needs to have the right temperament, passion to understand businesses and read years of annual reports and the patience to wait as well as sit still till the opportunity strikes. A great book that will not disappoint if one really wants to learn successful investing characteristics.

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