"The principles and values are similar"They are, but...

"The principles and values are similar"


They are, but briefly....


You scour the entire universe of 1,700 ASX listed stocks to find the 'magic' penny dreadful.
Do you back it with 100% of you net worth ? No.
Realistically you back it with 5% of your capital.
Here you are, spending an inordinate and disproportional amount of time trying to hit a home run with 5% of your capital (I will generously assume that in the process of doing so you will avoid the pitfalls which are part and parcel of the speculative end of the market, sometimes bad luck, at other times .. you know the drill). This is time which is no longer available for trying to maximise the return of your *entire* asset base.

There are physical limits as to how much you can earn on your *entire* capital for *long periods of time. Buffett's career annual return is 22%. His record will never be surpassed (that's a fact and no correspondence will be entered into).

Given those limits, is the penny-dreadful home-run approach the best way to maximise the risk-adjusted return of your *total* capital ?

I think not.

You don't even need to catch those companies at the penny dreadful stage. You can simply wait until they reach certain economic inflection points and still get a very good return with much less risk. I am thinking of a Woodside 20 years ago, or a Toll 10 years ago.

Personally, I am conscious of the fact that I can get a 60% risk-free 1st year return on every pre-tax dollar I contribute to super. I am then happy to let WOW earn 20% per annum thereafter for 20 years in a tax-advantaged environment. Buffett like returns without even trying.


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