“If you wake up thinking about a position, it’s too big” Steve Clarke
“Make your position size more a function of not how much you can make, but really how much you can lose. So manage your position based on your downward loss perspective not your upward potential.” James Dinan
“We will make something a large position if we think there is an extremely low chance of losing money on a permanent basis. Even if we think it might be a 4X return, if the idea could be a zero, it’ll be a small position” Ken Shubin Stein
“I’ll limit position sizes when potential outcomes are too binary” Chris Mittleman
“We do not bet the ranch on any single investment; few positions have exceeded 5% of assets in recent years” Seth Klarman
“We size things based on how much we think we can make versus how much we think we can lose. We’ll probably be willing to lose 5-6% of our capital in any one investment” Bill Ackman
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Over the last one year, I attended 3-4 fantastic value investing conferences. Many of the investors had spoken their heart out and many were not comfortable sharing their presentation publicly. Hence I have omitted the company and speaker names. But this compilation of mistakes of these investors could be helpful to both amateur and experienced investors.
Whenever I meet an experienced investor, I am more interested in their mistakes and not their success stories. I believe everyone investment philosophy should be as per their personality, so it’s not possible to follow someone else philosophy. But we can learn a lot from other’s mistakes. According to Dhirendra Kumar of fund tracker Value Research, Prashant Jain of HDFC mutual fund did not manage funds differently from other fund managers. “He just kept it simple and committed lesser mistakes,”. Read this fantastic article by Shane Parrish on Avoiding Stupidity is Easier than Seeking Brilliance to understand the importance of studying mistakes.
Here is the list of mistakes shared by investors:
Management
- Overlooking obvious good companies because of some small wrong acts of management eg. High remuneration, preferential issues at lower price etc. Refusing to invest in micro and small cap with fantastic business model and growth because of some IGNORABLE wrong acts of management is one of the most common mistakes.
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Santa knocks on all our doors not once, but four times a year. During his off-season, he reliably shows up bearing profitable gifts on February 14th, May 15th, August 14th and November 14th. These are the deadlines for 13-F filings with the SEC.
The “13-F” is a quarterly disclosure required of all individuals and entities who have $100 million or more invested in US equity markets. The 13-F is due within 45 days of quarter-end and lists the updated stock positions of the managers. These filings are publicly available at no charge to anyone. Websites like Dataroma make it a breeze to track the picks of various value investors. There is such a thing as a free lunch.
Non-believers will complain that buying these picks after a multi-month delay simply can’t work because markets are too efficient. Well… not so fast. A 2008 study by Professors Gerald Martin and John Puthenpurackal entitled, Imitation is the Sincerest Form of Flattery, cloned Berkshire Hathaway’s equity portfolio between 1976 and 2006 by investing in the positions with a substantial delay. Their cloned portfolio always bought (or sold) on the last trading day of the month that it was publicly disclosed that Buffett had bought a new stock or lightened up on an existing one.
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“There is one other rule you ought to keep in mind and that is to concentrate, and not only in the Zen sense. Sweet are the uses of diversity, but only if you want to end up in the middle of an average” Adam Smith, the Money Game
1968
“Statistical analysis shows that security-specific risk is adequately diversified after 14 names in different industries, and the incremental benefit of each additional holding is negligible. We own 18-22 companies to allow us to be amply diversified but have the flexibility to overweight a name or own more than one business within an industry.” Mason Hawkins
“Empirical testing has proved beyond a reasonable doubt that the “riskiness” of a portfolio of 12-15 diverse companies is little greater than one loaded with a hundred or more” Frank Martin
“If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don‘t diversify personally. ” Warren Buffett
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There are literally tens of millions of stock market and private investors today. The personal investing revolution has enabled anyone with a few hundred dollars to trade stocks. But we don’t have millions of great investors. Only a select few will ever be bestowed this title. So, how can you try to be one of them? You can emulate the people who were – or still are – the greatest. Below is our list of 8 of the greatest investors of all time; let us know in the comments below if you think we’ve missed out on any important names.
This list was compiled based on inputs from our members of Value Investing Clubs in UK, France, Belgium and Austria, and from our users at our FinTech company CityFALCON. Our focus at the Value Investing Clubs and CityFALCON remains on long-term fundamental investors who are looking to go through research to buy, hold and sell financial assets to generate strong higher than inflation returns.
Warren Buffett
We will just start off with the obvious case: Warren Buffett. Who doesn’t consider him one of the greatest, if not the greatest investor? Born just in time for the Depression (1930), Warren Buffett was born in Omaha, Nebraska, whence he eventually took his nickname “The Oracle of Omaha”.
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It was a $1 million bet: Could hedge funds outperform index funds over a decade?
Warren Buffett said no in 2007. Now it looks like the billionaire investor was right.
His chosen index fund, the Vanguard 500 Index Fund Admiral Shares, climbed 66% from the start of the bet through the end of 2015, compared with a gain of 22% for a basket of hedge funds selected by asset manager Protégé Partners, including fees.
The $1 million bet with Protégé Partners ends Dec. 31. At this point, it would take a massive stock-market drop for Mr. Buffett to lose. An extended bull market and sub par performance by many hedge funds since the 2008 financial crisis have helped his case.
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Mohnish Pabrai, managing partner of Pabrai Investment Funds, speaks during the Value Investing Congress in New York. Photographer: Daniel Barry/Bloomberg News
Since inception, Mohnish Pabrai has beat the stock market by triple digit returns. What was the key to his success? Pabrai would argue nothing unexpected or surprising. In fact, he attributes his massive success to a keen sense of cloning other super-investors like Warren Buffett and Charlie Munger. On the investing podcast, Pabrai discussed a range of topics to help explain his way of thinking and methods for achieving such strong performance.
Preston Pysh: [2:29] You have an IT background that not a lot of people know about. Would you have taken a different career path if you had found value investing first?
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Many of the great investors evolve over time to focus on high quality companies. In the post ‘Evolution of a Value Manager’ I outlined how Buffett, with insight from Munger and the acquisition of See’s Candy transitioned from seeking cheap companies [ie cheap PE/, price/book etc] to trying to purchase high quality companies at reasonable prices. Li Lu and Mohnish Pabrai are two Buffett disciples who have made a similar transition.
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Value investor Mohnish Pabrai wrote The Dhando Investor: The Low-Risk Value Method to High Returns (Wiley, 2007). It’s an excellent book that captures the essence of value investing:
The lower the price you pay relative to the probable intrinsic value of the business, the higher your returns will be if you’re right and the lower your losses will be if you’re wrong.
If you have a good investment process as a value investor, and you’re focused on cheap and good companies with low or no debt, then you are likely to be right on roughly 2/3 of your investments. Because losses are minimized on the other 1/3 – due to the low price paid – the overall portfolio is likely to do well over time.
Mohnish sums up the Dhando approach as:
Heads, I win; tails, I don’t lose much!
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