A few quotes from the presentation:
Not every idea has to be worthy of a very large position allocation to be included in our portfolio so long as each idea adds an unique element that contributes something to the favourable asymmetric payoff profile for the portfolio as a whole.
Value comes in many forms, including:
- Out-of-favor blue chips
- Out-of-favor cyclicals
- Distressed industries
- Discounts to cash
- Declining cash cows
- Overlooked small caps
- Oddball companies
- Fallen growth angels
- GARP (growth at reasonable price)
- Activist opportunities
There are several common “portfolio models” used by successful value investors that we have come across:
- Ultra-concentrated portfolio model
- Fewer than 10 stocks with large position sizes routinely comprising 20-25% of portfolio assets and larger.
- Practitioners: Chieftain, Eddie Lampert, Tom Brown.
- The 10 stock model
- Standard position size of around 10%, though there may be one or two larger positions, and a handful of smaller positions for a total of 12-20 ideas.
- Practitioners: Mohnish Pabrai, Clipper.
- Standard 20-stock model
- Standard position size for a good idea is about 5%, though best 2-3 ideas may be modestly larger and many ideas are somewhat smaller. Total portfolio of 25-40 ideas.
- Practitioners: Many of the value mutual fund managers on the previous slide: Robert Hagstrom, Bill Miller, Wally Weitz, Longleaf Partner, Tweedy Brown Value, etc.
- 20-stock model (super-sized)
- Essentially the same as standard 20-stock model, but two or three best ideas are “super-sized” to 10-15% of the portfolio, and there are fewer sub-5% positions. Total of 20-30 ideas.
- Practitioners: Tilson Focus, Fairholme, Sequoia, Oakmark Select.
“Confronted with the challenge to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” Benjamin Graham, Intelligent Investor.
Why is having a margin of safety important?
- Valuation is an imprecise art.
- The future is inherently unpredictable.
- Having a margin of safety provides protection against bad luck, bad timing, or error in judgment.