Diversified versus focused approach to investing

I am not sure whether this webpage was posted here before but it was a good read.

http://www.schloss-value-investing.com/

Quote:“Over the entire 45-year period from 1956-2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year…Every dollar a fortunate investor entrusted with Schloss at the start of 1956 has grown to $662 by the end of 2000, including all charges for management. A dollar investing in the S&P Index would have been worth $118.”

These are incredible numbers. 45 years of ~15% compounding turns $1 dollar into $662. It shows you the power of compounding
What I find interesting is that Schloss actually massively outperformed the market in the late 90s. This is quite a different experience to what any value investors dealt with in the late 90s
Note: These are returns to investors (i.e. the LPs). I have still not found the exact payment scheme Walter and Edwin used for their fund, but can you imagine the return to the GP? It’s out of this world

The gross return of Walter Schloss may not be lower than Warren Buffett.

(03-02-2013, 07:00 PM)CityFarmer Wrote:

(03-02-2013, 05:12 PM)shanrui_91 Wrote:

(03-02-2013, 04:25 PM)CityFarmer Wrote: shanrui, i assume the info is from book "The value investors" by Ronald W. Chan. I am reading it now.

you got it right, but mine is autographed by the author

the book really shows that there's so many methods and style out there that the successful value investor employs. I believe that the real superior style lies in the philosophy and emotion and not any specific method.

I concur. Autographed in Hong Kong or Singapore?

Isn't it similar with other things in life. All road (method or style) lead to Rome (success), as long as the direction (concept) is right The difference may be just the arrival time.

Agree... but I believe the philosophy have to match the emotion... and we need to be able to change as we age and gain more experience plus our circumstances changes...

In my case, I started out with a Diversified approach. Compared to now, I didn't analyse the stocks of interest in as much detail (not so easy to do without much internet access back then). I had also read about MPT (Modern Portfolio Theory) and I thought it made a lot of sense....

Sometime in '05, I read about the success story of Warren Buffett and was intrigued that he was able to achieve so much wealth through Value Investing... The more I read, the more I agreed that a Focussed Approach may be more suitable for me. After all those years of using a Diversified Approach, I realised that the benefits of reducing systemic risk also means my returns are not as meaningful on occasions when I'm right... Especially more so in absolute terms as my total assets was still very small... Diversification into 20-30 stocks means the amount I'd put into any single stock was tiny... Haha, I remembered posting in Wallstraits forum back then and was hammered left-right-centre by many of the experienced 'old birds' there (I was a newbie in that forum then)...

I slowly reduced my holdings to only 5 main stocks. Of course I always had this lingering fear on what if I'm wrong on any one stock.... To mitigate that, I focussed on what I deemed to be 'safer' stocks eg. Dividend Stocks (my thinking was if they're able to consistently pay dividends for say 10 years, supported by earnings, the chances of them closing shop soon is much lower...) and my fears drove me to do a lot more homework on my stocks.. I was lucky... that period coincided with the longest bull period I'd ever experienced... My assets grew multi-fold...

With a much bigger asset base, I started to increase the number of stocks again... There'll always be stocks that suddenly become attractive to me and I'd quickly grab some first (after some quick initial studies) when the opportunity arises (eg. Kingsmen recent CAD case). I'd then move quickly to do more detailed research and if I like what I'd analysed, I'd continue to buy more, even at a higher price (eg. Popular & Neratel).... When I run out of Free Cash, I'd then go thro' my stocks list and decide which one has to go (like the reality program, 'Survivor') ... eg. those that I think is not better than the latest target stock and which I think is the 'worst' in my portfolio..

In this way, I'm now Diversified as I can have 10-20 stocks (I started '12 with 20 but am now down to 10). But, I'm also Focussed as my Top 4 stocks now account for 77.5% of my holdings.

(04-02-2013, 06:51 AM)yeokiwi Wrote: I am not sure whether this webpage was posted here before but it was a good read.

http://www.schloss-value-investing.com/

Quote:“Over the entire 45-year period from 1956-2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year…Every dollar a fortunate investor entrusted with Schloss at the start of 1956 has grown to $662 by the end of 2000, including all charges for management. A dollar investing in the S&P Index would have been worth $118.”

These are incredible numbers. 45 years of ~15% compounding turns $1 dollar into $662. It shows you the power of compounding
What I find interesting is that Schloss actually massively outperformed the market in the late 90s. This is quite a different experience to what any value investors dealt with in the late 90s
Note: These are returns to investors (i.e. the LPs). I have still not found the exact payment scheme Walter and Edwin used for their fund, but can you imagine the return to the GP? It’s out of this world

The gross return of Walter Schloss may not be lower than Warren Buffett.

Walter Schloss charged no management fee, but net 20% of profit as profit sharing. Base on that, the gross is approx 18-19%

Warren Buffett is about 22%, but with a AUM of $400-500 billion, while Walter & Edwin Schloss Associate's AUM is unknown, but i assume it is much less that Warren Buffett.

Base on the above, i still holding my view that (Warren Buffett's) focus approach will have higher yield over (Walter Schloss's) diversify approach

(04-02-2013, 10:03 AM)KopiKat Wrote:

(03-02-2013, 07:00 PM)CityFarmer Wrote:

(03-02-2013, 05:12 PM)shanrui_91 Wrote:

(03-02-2013, 04:25 PM)CityFarmer Wrote: shanrui, i assume the info is from book "The value investors" by Ronald W. Chan. I am reading it now.

you got it right, but mine is autographed by the author

the book really shows that there's so many methods and style out there that the successful value investor employs. I believe that the real superior style lies in the philosophy and emotion and not any specific method.

I concur. Autographed in Hong Kong or Singapore?

Isn't it similar with other things in life. All road (method or style) lead to Rome (success), as long as the direction (concept) is right The difference may be just the arrival time.

Agree... but I believe the philosophy have to match the emotion... and we need to be able to change as we age and gain more experience plus our circumstances changes...

In my case, I started out with a Diversified approach. Compared to now, I didn't analyse the stocks of interest in as much detail (not so easy to do without much internet access back then). I had also read about MPT (Modern Portfolio Theory) and I thought it made a lot of sense....

Sometime in '05, I read about the success story of Warren Buffett and was intrigued that he was able to achieve so much wealth through Value Investing... The more I read, the more I agreed that a Focussed Approach may be more suitable for me. After all those years of using a Diversified Approach, I realised that the benefits of reducing systemic risk also means my returns are not as meaningful on occasions when I'm right... Especially more so in absolute terms as my total assets was still very small... Diversification into 20-30 stocks means the amount I'd put into any single stock was tiny... Haha, I remembered posting in Wallstraits forum back then and was hammered left-right-centre by many of the experienced 'old birds' there (I was a newbie in that forum then)...

I slowly reduced my holdings to only 5 main stocks. Of course I always had this lingering fear on what if I'm wrong on any one stock.... To mitigate that, I focussed on what I deemed to be 'safer' stocks eg. Dividend Stocks (my thinking was if they're able to consistently pay dividends for say 10 years, supported by earnings, the chances of them closing shop soon is much lower...) and my fears drove me to do a lot more homework on my stocks.. I was lucky... that period coincided with the longest bull period I'd ever experienced... My assets grew multi-fold...

With a much bigger asset base, I started to increase the number of stocks again... There'll always be stocks that suddenly become attractive to me and I'd quickly grab some first (after some quick initial studies) when the opportunity arises (eg. Kingsmen recent CAD case). I'd then move quickly to do more detailed research and if I like what I'd analysed, I'd continue to buy more, even at a higher price (eg. Popular & Neratel).... When I run out of Free Cash, I'd then go thro' my stocks list and decide which one has to go (like the reality program, 'Survivor') ... eg. those that I think is not better than the latest target stock and which I think is the 'worst' in my portfolio..

In this way, I'm now Diversified as I can have 10-20 stocks (I started '12 with 20 but am now down to 10). But, I'm also Focussed as my Top 4 stocks now account for 77.5% of my holdings.

Hi Kopikat,
Your comments and sharing almost always contain little jems that I can take away.
Thanks mate

When it comes to buying stocks for your portfolio, i always remind myself limiting my bat swinging to 3 times a year. You tend to treasure more about your swings, make sure it really hit the ball.

If you don't limit it or make it like 50, 100 times a year. Any balls come by good ball bad ball you also hit. The chances of miss hitting the balls also high.

Besides i find it hard to keep more than 15 stocks at 1 time, for individual very hard to monitor so many. Also finding 15 good stocks at good price is also very hard in SG. Not to talk about the good stock getting less and less by the days delisting privatizing and getting acquired.

So want to get more stocks want to diversify also cannot :p

(04-02-2013, 06:51 AM)yeokiwi Wrote: I am not sure whether this webpage was posted here before but it was a good read.

http://www.schloss-value-investing.com/

Quote:“Over the entire 45-year period from 1956-2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year…Every dollar a fortunate investor entrusted with Schloss at the start of 1956 has grown to $662 by the end of 2000, including all charges for management. A dollar investing in the S&P Index would have been worth $118.”

These are incredible numbers. 45 years of ~15% compounding turns $1 dollar into $662. It shows you the power of compounding
What I find interesting is that Schloss actually massively outperformed the market in the late 90s. This is quite a different experience to what any value investors dealt with in the late 90s
Note: These are returns to investors (i.e. the LPs). I have still not found the exact payment scheme Walter and Edwin used for their fund, but can you imagine the return to the GP? It’s out of this world

The gross return of Walter Schloss may not be lower than Warren Buffett.

The period 1950-2000 (except the 1970's) marked a raging secular bull market (see chart below). Most portfolios should have done well in this period.

[Image: 090812_SecularChart.jpg]

(04-02-2013, 12:14 PM)hongonn Wrote: When it comes to buying stocks for your portfolio, i always remind myself limiting my bat swinging to 3 times a year. You tend to treasure more about your swings, make sure it really hit the ball.

If you don't limit it or make it like 50, 100 times a year. Any balls come by good ball bad ball you also hit. The chances of miss hitting the balls also high.

Besides i find it hard to keep more than 15 stocks at 1 time, for individual very hard to monitor so many. Also finding 15 good stocks at good price is also very hard in SG. Not to talk about the good stock getting less and less by the days delisting privatizing and getting acquired.

So want to get more stocks want to diversify also cannot :p

So the choices are

- get focus and limit to only 10-15 stocks, otherwise no time to understand each one of them enough.
- if want to diversify to more than 15, then need to filter base on few performance ratios without going into detail. So not much time needed for each one of them.

(04-02-2013, 12:14 PM)hongonn Wrote: When it comes to buying stocks for your portfolio, i always remind myself limiting my bat swinging to 3 times a year. You tend to treasure more about your swings, make sure it really hit the ball.

If you don't limit it or make it like 50, 100 times a year. Any balls come by good ball bad ball you also hit. The chances of miss hitting the balls also high.

Besides i find it hard to keep more than 15 stocks at 1 time, for individual very hard to monitor so many. Also finding 15 good stocks at good price is also very hard in SG. Not to talk about the good stock getting less and less by the days delisting privatizing and getting acquired.

So want to get more stocks want to diversify also cannot :p

Perhaps the focus is to practice, practice, practice your swing until your hit rate improve

---

(04-02-2013, 10:03 AM)KopiKat Wrote:

(03-02-2013, 07:00 PM)CityFarmer Wrote:

(03-02-2013, 05:12 PM)shanrui_91 Wrote:

(03-02-2013, 04:25 PM)CityFarmer Wrote: shanrui, i assume the info is from book "The value investors" by Ronald W. Chan. I am reading it now.

you got it right, but mine is autographed by the author

the book really shows that there's so many methods and style out there that the successful value investor employs. I believe that the real superior style lies in the philosophy and emotion and not any specific method.

I concur. Autographed in Hong Kong or Singapore?

Isn't it similar with other things in life. All road (method or style) lead to Rome (success), as long as the direction (concept) is right The difference may be just the arrival time.

Agree... but I believe the philosophy have to match the emotion... and we need to be able to change as we age and gain more experience plus our circumstances changes...

In my case, I started out with a Diversified approach. Compared to now, I didn't analyse the stocks of interest in as much detail (not so easy to do without much internet access back then). I had also read about MPT (Modern Portfolio Theory) and I thought it made a lot of sense....

Sometime in '05, I read about the success story of Warren Buffett and was intrigued that he was able to achieve so much wealth through Value Investing... The more I read, the more I agreed that a Focussed Approach may be more suitable for me. After all those years of using a Diversified Approach, I realised that the benefits of reducing systemic risk also means my returns are not as meaningful on occasions when I'm right... Especially more so in absolute terms as my total assets was still very small... Diversification into 20-30 stocks means the amount I'd put into any single stock was tiny... Haha, I remembered posting in Wallstraits forum back then and was hammered left-right-centre by many of the experienced 'old birds' there (I was a newbie in that forum then)...

I slowly reduced my holdings to only 5 main stocks. Of course I always had this lingering fear on what if I'm wrong on any one stock.... To mitigate that, I focussed on what I deemed to be 'safer' stocks eg. Dividend Stocks (my thinking was if they're able to consistently pay dividends for say 10 years, supported by earnings, the chances of them closing shop soon is much lower...) and my fears drove me to do a lot more homework on my stocks.. I was lucky... that period coincided with the longest bull period I'd ever experienced... My assets grew multi-fold...

With a much bigger asset base, I started to increase the number of stocks again... There'll always be stocks that suddenly become attractive to me and I'd quickly grab some first (after some quick initial studies) when the opportunity arises (eg. Kingsmen recent CAD case). I'd then move quickly to do more detailed research and if I like what I'd analysed, I'd continue to buy more, even at a higher price (eg. Popular & Neratel).... When I run out of Free Cash, I'd then go thro' my stocks list and decide which one has to go (like the reality program, 'Survivor') ... eg. those that I think is not better than the latest target stock and which I think is the 'worst' in my portfolio..

In this way, I'm now Diversified as I can have 10-20 stocks (I started '12 with 20 but am now down to 10). But, I'm also Focussed as my Top 4 stocks now account for 77.5% of my holdings.

Hi 'KopiKat',

Your sound like Peter Lynch but in execution you are like Warren Buffett ( how else to explain a weightage of 77.5% for your Top 4)

Wow kopikat, there is something new to learn from U. Very disciplined approach. Would U regret for those counters being let go?

(04-02-2013, 10:42 AM)CityFarmer Wrote:

(04-02-2013, 06:51 AM)yeokiwi Wrote: I am not sure whether this webpage was posted here before but it was a good read.

http://www.schloss-value-investing.com/

Quote:“Over the entire 45-year period from 1956-2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year…Every dollar a fortunate investor entrusted with Schloss at the start of 1956 has grown to $662 by the end of 2000, including all charges for management. A dollar investing in the S&P Index would have been worth $118.”

These are incredible numbers. 45 years of ~15% compounding turns $1 dollar into $662. It shows you the power of compounding
What I find interesting is that Schloss actually massively outperformed the market in the late 90s. This is quite a different experience to what any value investors dealt with in the late 90s
Note: These are returns to investors (i.e. the LPs). I have still not found the exact payment scheme Walter and Edwin used for their fund, but can you imagine the return to the GP? It’s out of this world

The gross return of Walter Schloss may not be lower than Warren Buffett.

Walter Schloss charged no management fee, but net 20% of profit as profit sharing. Base on that, the gross is approx 18-19%

Warren Buffett is about 22%, but with a AUM of $400-500 billion, while Walter & Edwin Schloss Associate's AUM is unknown, but i assume it is much less that Warren Buffett.

Base on the above, i still holding my view that (Warren Buffett's) focus approach will have higher yield over (Walter Schloss's) diversify approach

Although Warren Buffett has a much larger AUM, his berkshire hathaway does not face with redemption issue like walter schloss. Their businesses are the same but the mode of operation is different.

http://www.frankvoisin.com/2012/02/20/wa...ies-at-95/

Quote:He started his own fund in 1955 and until 2002 earned average annual returns (after fees) of a stunning 16% (not compounded; he returned each year’s gains unless instructed to reinvest).

I am not sure how accurate is the above statement.(Any walter schloss' investor here??) But if it is trued, his return is no less than Buffett.

So essentially, the only theory that is common to both investors is to buy cheap and even a highly diversified portfolio will get an equally high return.

Not to mention that a diversified portfolio has a lower probability of a single event that will wipe out 10-20% of the portfolio.