With each passing year I realize that I should concentrate much more on my best ideas, instead of having a few more businesses for the sake of diversification.
The specific examples were Facebook, Apple and Moody’s this year.
With Facebook, I decided to not go over 20% of my IB account. At approximately 130$ a share, Facebook was a no brainer and an incredible opportunity. Looking at FB around those prices, I kept thinking about the salad oil crisis of American Express. If I am not incorrect, Buffett had put 40% of his portfolio in it.
With Apple, I reasoned that I already have positions via Berkshire – 10% of my portfolio. I also was concerned that I am being too aggressive on tech names. With Google, FB, and Apple – I was touching 70% of my IB portfolio! With these reasons in mind, I only put 10% of my portfolio in Apple.
Moody’s was a mistake of omission. Last year, to teach a value investing course … I needed to come up with an example with a serious moat that has survived several problems and came out stronger. After rejecting Visa/MasterCard, and Google/Facebook, I finally zeroed in on Moody’s.
Moody’s has a phenomenal moat and has survived a direct attack in 2009 (profit was up ~ 20% that year). Arguably, the stupidity of rating agency models were responsible for the pervasiveness of the financial crash of 2008. Still, they were able to argue that ratings qualified as free speech and hence are protected by the Constitution, even if they are way off the mark.
I ran my simple valuation model (earning multiple = growth + dividend) and came up with a price of 135$, while the stock was at $150. I decided to pass and wait for a lower price.
My mistake was not to adjust my simple model for business quality.
I am in two minds about learning from these “mistakes”.
Would I have put my decision making through a reevaluation if my return this year (~ 26%) exceeded that of S&P500 (~ 31%)?
To compare, last year I did ~ 1% while S&P500 did ~ -4%. I was not bothered that much then. My gains came from a near double of (Hikma Pharmaceutical) and I was much more active. I fail to see why I did not put myself through the grinder then even though it was clear that I made many decisions then. In particular, I decided to reduce the number of positions I had from ~ 12 to 5! A more interesting question to ask is if that was a mistake?
Should I have gone over 20% of portfolio for Facebook?
I was extremely sure about the fact that FB will come back. I see the trident of Facebook, Instagram and Whatsapp as a set of apps which are almost impossible to kick for a user. But then, I have a rule of 20% to protect myself from my overconfidence. Did the strength of my confidence allow me to break my rule?
Should I have built a larger position in Apple?
This one, at least, is a clear yes. A harder question to ask is: should you worry about sector specific risk in your portfolio? What made me uncomfortable is a > 70% concentration in technology stocks. There are several mental gymnastics to get out of this predicament. One can just say that Apple is not a tech company, albeit a product company. I am going to give this question some thought and see why this makes me uncomfortable.
- Still keeping the rule of 20% for max p