Are you concentrating hard enough?
I sure am!
The top two shares account for 78 percent of our concentrated share fund. The top three 92 percent.
So yes, we’re concentrated!
Two great investing principles
The five shares in the portfolio reflect two simple investing principles.
Two rules from two great investors, Peter Lynch and Warren Buffett.
Water your flowers and pull out the weeds, and only own a handful of companies.
I learnt both rules from Peter Lynch. Though it was Warren Buffett who popularised the concentrated approach with his catchy 20 ticket punch card analogy and his ‘You don’t have to swing at everything — you can wait for your pitch’ phrase.
Lynch was more mater-of-fact.
‘The smallest investor can follow the Rule of Five and limit the portfolio to five issues. If just one of those is a 10-bagger and the other four combined go nowhere, you’ve still tripled your money.’
I illustrated that point in this post highlighting how the view of ‘the greater the loss the ever greater the gain required to make you whole again’, was wrong. For example instead of requiring a 400 percent gain to make up for an 80 percent loss as contended, due to the parallel nature of investing an 80 percent loss is balanced by an 80 percent gain.
The two largest positions are a result of watering of the flowers. Adding on the way up and then simply holding on. Though the second largest has now been trimmed three times. A potential fourth haircut inspired this post.
There are only five companies in the portfolio as the weeds have been pulled.
The third largest portfolio position deserves some water. It’s management are frugal and appear focused on safely growing and rewarding shareholders.
The smallest two positions are speculative long shots. They’ll only receive water if their odds of success shorten.
Please keep in mind there are many right paths. We hold close to 20 companies in our super fund. Plus our concentrated fund has and likely will hold more companies.