Welcome to a new month and the first newsletter in the 2nd half of 2021.
Today we will be discussing a counter intuitive principle some astute investors practice. This observation was first mentioned by Stanley Druckenmiller.
Stanley Druckenmiller is an American investor and hedge fund manager. He was the fund manager that helped another investing legend – George Soros pull off a deal that earned Soros a $1 billion profit in 1 day in a bet against the British Pounds.
He famously returned all his investors’ funds in 2010 and converted the company (Duquesne Capital) into a family office.
According to Mr. Druckenmiller, major investors like Warren Buffet, Carl Ichan and George Soros all have 1 thing in common – they make large concentrated bets or positions in companies as opposed to holding a diversified portfolio of shares/stocks. This act or action runs contrary to what business schools teach about investing.
To confirm his position, I will like to refer us to March 1 newsletter where we discussed the portfolio holdings of Warren Buffet’s Berkshire Hathaway. I have copied the entire paragraph in italics below:
- From the letter, over 85% ($240 billion) of Berkshire Hathaway’s value resides in 4 businesses – 3 fully and 1 marginally (5.4%) owned. These businesses are –
- Insurance: GEICO and National Indemnity
- BNSF: America’s largest railroad by freight volume
- Berkshire Hathaway Energy
- Apple – 5.4% shareholding
About the Apple stake – Berkshire commenced staggered purchase of the shares in late 2016 up until mid-2018 (5.2% ownership then).
- Purchase value of stake – $36 billion (market value as at December 2020 – $120 billion)Average annual dividend from 2017 – $775 million (this amount is similar to what the Walton family make as annual dividend from their Walmart shares)Sold a portion in 2020 for a profit of $11 billion!
2 things comes to mind – the fact that Pareto’s principle holds true here and that truly, it is far better to have marginal ownership in a wonderful business indeed! The Apple stake is what we refer to in pidgin as “small but mighty”.
According to Druckenmiller, these investors make these concentrated bets only in companies or businesses they have a lot of conviction or belief in. They do not hold 35 or 40 different stocks.
He believes this decreases the overall risk of their portfolio as they are able to focus on the few shares they hold massive positions in.
Another investor in this category is Carl Icahn who is quoted as saying “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”
Mr Icahn is popularly known as an activist investor who takes large positions in companies he believes are undervalued so he can force changes to boost profitability before offloading a huge chunk. This strategy has worked because he has a net worth of $15.1 billion according to Forbes. (Watch out for more on him).
These 2 men epitomise Mark Twain’s quote “Put all your eggs in one basket and watch the basket carefully.”
Although the vaccination rates on this side of the world are extremely low, please let us play our part by ensuring we get the 2nd dose of the corona virus vaccine if we are qualified to do so.
For those who missed the 1st phase of vaccinations, kindly note that the 2nd phase of national vaccinations has already commenced. Please ensure that you do the needful.
Till next week, continue to stay safe and do have a fruitful week.