Portfolio Management

When you're hunting for elephants, don't get distracted with rabbits.

This may be one of the most important topics for a fund manager.
I have read a lot in a short span of 2.5 years; after all, it's only when I stand on the shoulders of giants that I can see far.

I have noted that value investing is a tricky business, not because it's difficult - hell, it's easy to find a few bargains - but conviction, patience, gumption and controlling one's behaviour is mighty difficult.

Seth Klarman, Bruce Berkowitz, WB, Prem Watsa, RJ, JM Eveillard, Howard Marks, Leucadia and Markel guys, Mohnish Pabrai have been the main contributors towards who I am becoming.
And they dont talk much about diversification, rather, they talk about focus.
A focus on moats and the price you pay.

And then they say, dont invest in too many companies.
Because you definitely cant believe that you will make as much money on your 20th best idea as you will on your best or 2nd best idea.
I never understood a portfolio with more than 30 companies - Peter Lynch spoke often about his 1000+ companies, and I was baffled. How can this make sense?

Good, quality companies are hard to come by, and the essence of diversification lies in the ability to sell a company that is well-priced and buy another which is poorly priced.
May be it also keeps your brain more active.
And then, you run the risk of not putting enough money into a Berkshire Hathaway in the 1970s for example.

My concern is:
What if I find a company trading at 3x earnings/ cash flow/ whatever floats your boat - and I invest a princely 2% of my portfolio in it?
And what if I invest in another company at 8x, another 2%?
And what if the prospects of the cheaper company are better because of its odd moat?


The chief risk with over-sizing is highlighted by Mohnish Pabrai and his investment in Delta Financial. A 100 year storm tore down the business, and his investment went to zero.
But his concentrated quality portfolio still allowed him to keep compounding thence.


Finding a mispriced security is based on maths and knowledge and experience.
Structuring and controlling your portfolio can be based only on a checklist and what one is comfortable with - hence, art.

Pabrai, marketing, relationships and today

Longevity is more important that a short lived, sudden success.

Am currently watching Pabrai talking about Marketing and human relationships. One would think that someone in the stock market shouldn't care too much about the seemingly thoretical subject of marketing.
But, everything adds up.
For example, I can well imagine why Bajaj Auto will succeed where Hero will become mediocre.

Also talks a lot about cloning in businesses. It's fantastic to copy; somehow kids in India are more than happy to do so, but as grown-ups, they find it demeaning. 

In other news, there is a sudden bout of euphoria in the Indian markets because Narendra Modi will be India's next Prime Minister. Let's see what he does.
Meanwhile, I refuse to buy things based on prospects and at a price above my understanding.

There is a beautiful Seth Klarman quote.

“…conservatism may cause investors to refrain from making some investments that in hindsight would have been successful, but it will also prevent some sizable losses that would ensue from adopting less conservative business valuations.”

I think I am currently there right now. 

Price Actions

It's odd that one feels better with a paper gain than with a paper loss.
Particularly, when the underlying companies have similar performance, and potential prospects.

No wonder Buffett once said at an interview with the FCIC "... price action alone starts dominating people's minds."
Those words stuck with me, and now I see the gravity of the statement.

The potential of a value trap, the gnawing feeling of envy, and the doubt about an investment decision, all, after a period of time, are influenced by an asset price.

It is then that one has to sit back and question whether the mistake is in one's decision or in the markets'.

Mr. Market is there only to guide you, not to influence you.

I read this, and I spoke about this, but it is only in the face of exuberance that one questions one's judgements.