Portfolio Management - Focus Investing

Portfolio Management - Focus Investing

How many stocks an investor owns and how long he holds them has an enormous impact on returns. Two investors with the same investment philosophy but different approaches to portfolio management will produce dramatically different results. Buffet's approach to managing Berkshire's stock investments has been distinguished by two primary characteristics: a high degree of concentration and extremely long holding periods. In each of these areas, his thinking is unconventional.

Buffet believes that exceptional returns come from concentrated portfolios, that excellent investment ideas are rare, and he has repeatedly told students that their investing results would improve if at the beginning of their careers, they were handed a twenty-hole punch card representing the total number of investments they could make in their lifetimes. As he summarized in the 1993 annual report, "We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it."

Buffet's pattern of investment at Berkshire has been similar to the pattern of underwriting at his insurance subsidiaries, with long periods of inactivity interspersed with occasional large investments. The top five positions in Berkshire's portfolio have typically accounted for a remarkable 60-80 percent of it's total value. This compares with 10-20 percent for the typical mutual fund portfolio. On at least four occasions, Buffet invested over 15 percent of Berkshire's book value in a single stock, and he once had 40 percent of the Buffet Partnership invested in American Express.

The other distinguishing characteristic of Buffet's approach to portfolio management is extraordinarily long holding periods. He has currently held his top five stock positions (with the exception of IBM, which was purchased in 2011) for over twenty years on average. This compares with an average holding period of less than one year for the typical mutual fund. This translates into an exceptionally low level of investment activity, characterized by Buffet as "inactivity bordering on sloth."

These two portfolio management tenets combine to form a powerful and highly selective filter, one that very few companies pass through.

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Source

The Outsiders by William N. Thorndike, Jr.

Chapter 8, The Investor as CEO