Finally was able to set some time aside to read Howard's latest memo Jan 13, 2022 "Selling out" - Howards memos are required reading for me in my house. others may enjoy also.
Excerpt -
"I described the discussions that took place while Andrew and his family lived with Nancy and me in 2020 in Something of Value. That experience truly was of great value – an unexpected silver lining to the pandemic. That memo evoked the strongest reaction from readers of any of my memos to date".
Virtually all investors – even the best – diversify their portfolios. We may have a sense for which holding is the absolute best, but I’ve never heard of an investor with a one-asset portfolio. They may overweight favorites to take advantage of what they think they know, but they still diversify to protect against what they don’t know. THAT means they sub-optimize, potentially trading off some of their chance at a maximal return to increase the likelihood of a merely excellent one.
Here’s a related question from my reconstructed conversation with Andrew:
H: You run a concentrated portfolio. XYZ was a big position when you invested, and it’s even bigger today, given the appreciation. Intelligent investors concentrate portfolios and hold on to take advantage of what they know, but they diversify holdings and sell as things rise to limit the potential damage from what they don’t know. Hasn’t the growth in this position put our portfolio out of whack in that regard?
A: Perhaps that’s true, depending on your goals. "BUT TRIMMING would mean selling something I feel immense comfort with based on my bottom-up assessment and moving into something I feel less good about or know less well (or cash). To me, it’s far better to own a small number of things about which I feel strongly. I’ll only have a few good insights over my lifetime, so I have to maximize the few I have".
All professional investors want good investment performance for their clients, but they also want financial success for themselves. And amateurs have to invest within the limits of their risk tolerance. For these reasons, most investors – and certainly most investment managers’ clients – aren’t immune to apprehension regarding portfolio concentration and thus susceptibility to untoward developments. These considerations introduce valid reasons for limiting the size of individual asset purchases and trimming positions as they appreciate" - Excerpt from Howard's latest memo. Full memo here - https://www.oaktreecapital.com/insights/...elling-out
>
The older I got, the more I realized, I would rather have 4 Shiny Quarters, than 100 dull pennies.
Opinions vary (This one's mine)
- Scoot
“Most investors think diversification consists of holding many different things, few understand that diversification is effective only if portfolio holdings can be counted on to respond differently to a given development in the environment”- Howard Marks
"Is a relatively concentrated strategy really more risky for the investor? There’s no doubt that the concentrated portfolio will exhibit more volatility on average than a highly diversified one, but volatility isn’t a very useful descriptor of risk. If we think that risk is roughly equivalent to the probability of losing money on an investment, then perhaps we should ask, “are you more likely to lose money owning a concentrated portfolio or a highly diversified portfolio?”
The common sense answer is that it depends on what’s in each portfolio! - Howard Marks
Excerpt -
"I described the discussions that took place while Andrew and his family lived with Nancy and me in 2020 in Something of Value. That experience truly was of great value – an unexpected silver lining to the pandemic. That memo evoked the strongest reaction from readers of any of my memos to date".
Virtually all investors – even the best – diversify their portfolios. We may have a sense for which holding is the absolute best, but I’ve never heard of an investor with a one-asset portfolio. They may overweight favorites to take advantage of what they think they know, but they still diversify to protect against what they don’t know. THAT means they sub-optimize, potentially trading off some of their chance at a maximal return to increase the likelihood of a merely excellent one.
Here’s a related question from my reconstructed conversation with Andrew:
H: You run a concentrated portfolio. XYZ was a big position when you invested, and it’s even bigger today, given the appreciation. Intelligent investors concentrate portfolios and hold on to take advantage of what they know, but they diversify holdings and sell as things rise to limit the potential damage from what they don’t know. Hasn’t the growth in this position put our portfolio out of whack in that regard?
A: Perhaps that’s true, depending on your goals. "BUT TRIMMING would mean selling something I feel immense comfort with based on my bottom-up assessment and moving into something I feel less good about or know less well (or cash). To me, it’s far better to own a small number of things about which I feel strongly. I’ll only have a few good insights over my lifetime, so I have to maximize the few I have".
All professional investors want good investment performance for their clients, but they also want financial success for themselves. And amateurs have to invest within the limits of their risk tolerance. For these reasons, most investors – and certainly most investment managers’ clients – aren’t immune to apprehension regarding portfolio concentration and thus susceptibility to untoward developments. These considerations introduce valid reasons for limiting the size of individual asset purchases and trimming positions as they appreciate" - Excerpt from Howard's latest memo. Full memo here - https://www.oaktreecapital.com/insights/...elling-out
>
The older I got, the more I realized, I would rather have 4 Shiny Quarters, than 100 dull pennies.
Opinions vary (This one's mine)
- Scoot
“Most investors think diversification consists of holding many different things, few understand that diversification is effective only if portfolio holdings can be counted on to respond differently to a given development in the environment”- Howard Marks
"Is a relatively concentrated strategy really more risky for the investor? There’s no doubt that the concentrated portfolio will exhibit more volatility on average than a highly diversified one, but volatility isn’t a very useful descriptor of risk. If we think that risk is roughly equivalent to the probability of losing money on an investment, then perhaps we should ask, “are you more likely to lose money owning a concentrated portfolio or a highly diversified portfolio?”
The common sense answer is that it depends on what’s in each portfolio! - Howard Marks