Portfolio allocation

Originally posted by Klogg ↑

@mal85 - I like to think of myself as a long-term investor, but some investments I've made say otherwise... Take everything I say with a grain of salt, because my performance is not amazing, all things considered. From memory (I'm on holiday and don't have access to a few docs), my record is above the index, but not in the 30%+ range, where most great investors would be with my level of capital (< $2m). Luckily age works in my favor right now (32), and I have a long runway ahead of me.

I'll only cover my most recent thoughts on this because they do change over time. However, you've hit on the point I've been thinking about most - asset allocation and investment returns.

If you're quite passive in your approach, then casting the net as wide as possible makes complete sense. That's partly why indexing works so well. You don't want to think about it, so you buy a bit of everything and take the market returns. Ray Dalio takes this further in his all-weather portfolio. But that only applies if you want market returns (which are still above the average). If you truly want to be great at this, you have to concentrate your portfolio. More and more I find great investors holding 2 or 3 companies, knowing them better than they know themselves. This also works because they only invest their own money, so large swings don't really bother them.

The more I think about it, the more I realize I should just wait, set the bar VERY high, then go hard when I know the time is right. I'm not investing a lot of money relative to the size of basically all companies, so liquidity is not really an issue (although I failed to get enough ANO initially. Only managed 2/3 of what I was after). Warren Buffett's whole elephant hunting scenario comes to mind, except he has the bar set lower because of the size of FUM.
Instead, I can wait for the scenarios that are so far in my favor that it's hard to lose money.

This is very recent for me, and I haven't yet taken an initial position of 30%+, but I find myself becoming far more selective. The next step is to remove anything that doesn't meet the new set of criteria and allocate it to the better positions, but I'm finding some comfort in not doing so, for some odd reason.

In reality, my 4 biggest holdings (ANO, FSA, DDR, UOS) should really hold 90%+ of my capital, but I'm not there yet (and DDR is probably too expensive for my liking). Really, I should be asking myself 'am I willing to commit 20% of my capital to this position?'. If not, I shouldn't bother with it at all.

I'm sure many will disagree, but I do know @MarsC had the same train of thought on LYL.

As for the other points you raise on when the gains are made, I think that's irrelevant. Sometimes a catalyst will come immediately, or three years down. Other times, sentiment will turn and you won't see returns for many years. It doesn't matter how long it takes for the market to act as a weighting machine, only that it does eventually.

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I think accepted wisdom is that it doesn't matter how long things take to reach IV. I think this is correct theoretically but incorrect empirically, for the following reasons:
1) you could be wrong- business conditions change and thesis creep kicks in
2) payoff has to be big, for a 3yr pay-off to be worthwhile. unless you are getting a few hundred percent then it will be a poor decision.
3) there is a structural difference between bull and bear markets. if you want to hit 30% pa returns u need 50% in bulls and 10% in bears. it is ok to play the long game during bear markets, but if you need a multi year payoff during a bull market there are almost always better investments elsewhere leading on to 4
4) there is almost no investment needing a multi-year payoff for which there aren't better investment alternatives elsewhere except in very very very niche markets or where the payoff is extremely large.