Ann: Trading Update, page-61

Interesting discussion.
My 2c for what it’s worth:

1) portfolio allocation
- disagree with @madamswer that the transactional cost is a meaningful deterrent to concentrated holdings. It just changes the decision making process. Simple illustration follows- assuming we are long term investors- average hold duration may be something like 3-5 years. If there is a 25% immediate cost of selling and estimated 5yr return of 10%pa you can backsolve the required return for a high conviction investment (eg 80% probability of success) and make calculated decisions regarding optimal capital allocation. Considering @madamswer that you emphasize capital allocation discipline in your businesses I am surprised you don’t have the same requirments for your own investment process. I contend that if you are not systematically doing some variation of the above you will eventually drift downwards in terms of overall portfolio return.

2) high quality versus cigar butt
Here I agree more with @madamswer than @travelightor that unfortunately the price of stocks depends on the whims of other market participants and the majority of market participants is changing constantly. Therefore the relative over and undervaluation of sectors varies considerably. If you are limiting yourself to one asset class you are substantially limiting over the cycle returns. Of course it is important to stay within your circle of competence, but no reason the circle of competence can’t be expanding continuously.  Although high quality large cap are trading at veryrich multiples there are many sectors of the market that are substantially undervalued.