Concentrated Portfolio
from notes of Berkshire Hathaway Meeting
Question: Who are some present-day mentors young people should look to?
Warren Buffett: You don't need to look to present-day people. If you learn the lessons of Tom Murphy, you don't need any others in business. The lessons are timeless. There's going to be a Harvard Business School case study on Cap Cities. If you learn certain lessons from the right people, that knowledge won't change.
[Editor's note: Thomas Murphy was CEO of Capital Cities/ABC until Disney (NYSE: DIS) bought the company in 1996.]
Charlie Munger: We're not following the examples of any 40-year-old investors.
WB: I didn't know there were any 40-year-olds; I thought they were all 25. [Laughter]
Investing is not complicated; you work to find pockets of value. You didn't need a high IQ to buy junk bonds in 2002 -- you needed to have the courage of your convictions when everyone else was terrified, and it was the same in 1974. People were paralyzed. You need to learn to follow logic rather than emotion, and that's easier for some people to do than others.
CM: We had less competition when we were young, though. There weren't too many smart people in the investment business back then. Now, all kinds of bright people want to be in investment management. But in those days, we'd often be the only buyers.
WB: But Charlie, in 2002, there was lots of money and there were lots of smart people, and it was still easy to make a lot of money in junk bonds.
CM: Yes, but you get a lot of weird behavior during a convulsion like that. If you can be wise when everyone else is terrified, you'll do well.
WB: Two years ago, a lot of great companies in Korea were trading at three times earnings.
CM: That was a result of the Asian meltdown in the late 1990s.
WB: Yes, it took a big convulsion for Korean valuations to get so low. But there were plenty of smart people around, and all of the relevant information was freely available to them.
CM: Then name 20 more like that.
WB: If I had 20 more, I wouldn't name them.
Question: If you were starting today with $1,000,000, with a goal of 20% average growth for 40 years, what would be your strategy in the first five years?
WB: I formed my first partnership 50 years ago Tuesday with $105,000. You don't need to have a lot of great ideas. If Charlie and I were starting again, Charlie would say we shouldn't be doing this ... but we'd be doing something very similar. Charlie would say we couldn't find 20 [investment ideas], but we don't need 20. We only need a few that can pay off very big. I'd follow the same strategy we follow now, although we'd be able to look at smaller stocks than we look at now. We'd have a tough time if trying to buy businesses. We'd have no reputation; we'd be too small of a player.
Charlie started out in real estate development because it took very little capital, and you can magnify brain power and energy in real estate, but, the basic principle wouldn't be different. If I were running a small partnership a couple of years ago, it would be 100% in Korea. We'd look for something that was mispriced and underowned.
CM: Finding a single investment that will return 20% per year for 40 years tends to happen only in dreamland. In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That's your opportunity cost. That's what you learn in freshman economics. The game hasn't changed at all. That's why Modern Portfolio Theory is so asinine.
WB: It really is, folks.
CM: If Warren were starting today, he'd put together a concentrated portfolio. Your one or two best ideas are way better than the rest. So when you act, you're thinking about how the alternatives compare with your best idea. But you don't want to own your 10th-best idea when you can use that cash to invest in your best idea.
Question: Who are some present-day mentors young people should look to?
Warren Buffett: You don't need to look to present-day people. If you learn the lessons of Tom Murphy, you don't need any others in business. The lessons are timeless. There's going to be a Harvard Business School case study on Cap Cities. If you learn certain lessons from the right people, that knowledge won't change.
[Editor's note: Thomas Murphy was CEO of Capital Cities/ABC until Disney (NYSE: DIS) bought the company in 1996.]
Charlie Munger: We're not following the examples of any 40-year-old investors.
WB: I didn't know there were any 40-year-olds; I thought they were all 25. [Laughter]
Investing is not complicated; you work to find pockets of value. You didn't need a high IQ to buy junk bonds in 2002 -- you needed to have the courage of your convictions when everyone else was terrified, and it was the same in 1974. People were paralyzed. You need to learn to follow logic rather than emotion, and that's easier for some people to do than others.
CM: We had less competition when we were young, though. There weren't too many smart people in the investment business back then. Now, all kinds of bright people want to be in investment management. But in those days, we'd often be the only buyers.
WB: But Charlie, in 2002, there was lots of money and there were lots of smart people, and it was still easy to make a lot of money in junk bonds.
CM: Yes, but you get a lot of weird behavior during a convulsion like that. If you can be wise when everyone else is terrified, you'll do well.
WB: Two years ago, a lot of great companies in Korea were trading at three times earnings.
CM: That was a result of the Asian meltdown in the late 1990s.
WB: Yes, it took a big convulsion for Korean valuations to get so low. But there were plenty of smart people around, and all of the relevant information was freely available to them.
CM: Then name 20 more like that.
WB: If I had 20 more, I wouldn't name them.
Question: If you were starting today with $1,000,000, with a goal of 20% average growth for 40 years, what would be your strategy in the first five years?
WB: I formed my first partnership 50 years ago Tuesday with $105,000. You don't need to have a lot of great ideas. If Charlie and I were starting again, Charlie would say we shouldn't be doing this ... but we'd be doing something very similar. Charlie would say we couldn't find 20 [investment ideas], but we don't need 20. We only need a few that can pay off very big. I'd follow the same strategy we follow now, although we'd be able to look at smaller stocks than we look at now. We'd have a tough time if trying to buy businesses. We'd have no reputation; we'd be too small of a player.
Charlie started out in real estate development because it took very little capital, and you can magnify brain power and energy in real estate, but, the basic principle wouldn't be different. If I were running a small partnership a couple of years ago, it would be 100% in Korea. We'd look for something that was mispriced and underowned.
CM: Finding a single investment that will return 20% per year for 40 years tends to happen only in dreamland. In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That's your opportunity cost. That's what you learn in freshman economics. The game hasn't changed at all. That's why Modern Portfolio Theory is so asinine.
WB: It really is, folks.
CM: If Warren were starting today, he'd put together a concentrated portfolio. Your one or two best ideas are way better than the rest. So when you act, you're thinking about how the alternatives compare with your best idea. But you don't want to own your 10th-best idea when you can use that cash to invest in your best idea.
