Diversified versus focused approach to investing

(05-02-2013, 07:19 AM)yeokiwi Wrote:

(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.

Base on my math, it still seems conclusion is focus approach is better than diversify approach. 16% (net) or 18% (gross) of Walter Schloss vs 22% (net) of Warren Buffett.

Do i miss anything? Not sure how the mode of operation affect the result?

(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.

It seems to me all great investors are either Ben Graham's or WB's style in a way. In short, for value investors, weight-age is put on value first. But WB is more KIASU he also look at fundamentals too before he buys any.
For me if i can put just a miniscule bit into practice of what they do, i think is enough for me to survive in the markets.

There is another perspective to the argument between diversified and focused approaches and that is buy and sell (not incessant trading but regular portfolio rebalancing) versus buy and hold (assuming no market timing and both are fully invested at all times).
I do not have hard data to back me up but my very limited experience is that more of the focused approach investors are also inclined to buy and hold as they are comfortable holding large outsized positions. Whereas diversified approach investors tends to buy and sell as they rebalance their portfolios.
The latter has a drag in the US but not in Singapore due to the presence of capital gains tax over there - this can account for as much as 20% difference in performance.
For the record I am a diversified approach buy and sell investor (but almost no market timing and almost always fully invested).

Despite the differences in the Warren Buffett (Focussed) and Schloss (Diversified) approach, more importantly (for me), I see the similarities,

1. They share the same cornerstone (foundation) in their approach ie. Benjamin Graham's Intrinsic Value + Margin of Safety.

2. They're able to adapt and maximise (1) according to their own strength and weakness. In the case of Warren Buffett, together with Charlie Munger's complex modelling, they're able to identify with a high degree of confidence on great stocks / biz. So, they find the focussed approach more suitable. For Schloss, they're not comfortable that there'll always a possibility of being wrong, so, they find the Diversified approach more suitable.

3. Both achieved much better than benchmark returns over a sustained period of time.

In conclusion, it's not really very important (to me) who achieved better returns using which method. More importantly, try to understand, adapt and apply (1) which fits our own temperament, character, age, fund size,...etc. Also, be prepared to be dynamic and allow ourself to evolve our approach over time and experience. Our ultimate aim is to achieve (3)....

Nice thread here!

For newbies, it is better to take the diversified approach - as concentration can kill if done wrong. For diversified, at worst - perform as well as the index, and possibly, slight outperformance of the index if done badly, and quite a decent outperformance against the index if done right.

(11-02-2013, 11:16 PM)erickong Wrote: Nice thread here!

For newbies, it is better to take the diversified approach - as concentration can kill if done wrong. For diversified, at worst - perform as well as the index, and possibly, slight outperformance of the index if done badly, and quite a decent outperformance against the index if done right.

But not too diversified, you will not have time to review the companies which you have invested, since most of us is not full time investor. We have a day job.

I will always monitor and even do further research on companies which I've invested on, so as to ensure that my vested interested is well taken care by the managements. At times, I would invested more if I see there are greater potentials in the company.

Investment is hard work but fun and the by product is investment returns.

Cheers!