Ann: Trading Update, page-33

I would argue that if one's share portfolio represents only 10% of his/her overall wealth, then it makes more sense to run an even more concentrated portfolio.

If SDI represents 2% of a share portfolio, which in turn represents only 10% of the overall wealth, even if SDI doubles in price, it will only add 0.2% to the overall wealth performance. Considering that one still has to do the same amount of research and thinking, it's not really that worthwhile in my opinion.

It was foolhardy of me to introduce my personal circumstances, but to elaborate, I'm sure in 30 years time a far greater proportion of my wealth will be in the market in some way, shape or form, and my relative allocation currently is a function of my business and personal circumstance. My thinking is, one must practice the way one would like to perform eventually, and I don't think I could stomach having 20 - 30% of my wealth in one stock when I eventually lose the ability to make up for past mistakes, or bad 'luck' - I'm not suggesting this is a proven way to achieve the 'best' returns, but having a concentrated portfolio does of course leave you more susceptible to the ramifications of out of left field events, and by having a concentrated portfolio a 25% company specific drop may cause more stress for me than I would desire (a 25% market wide drop would be more of an opportunity than a stress). This obviously comes back to risk appetite, and stress free investing.

Diversification is also an easy and very common excuse to be less stringent in our analysis. How many times have we heard investment advisors say "Allocate a small portion of your portfolio for more speculative stocks!" ? In my dictionary, this is just an excuse to skip thorough analysis and gamble in the name of investing.

I completely agree, and one should call this gambling with a portion of ones wealth. Having said that, some people may get enjoyment from such endeavours, but as far as long term financial rewards - this will of course come down to luck. Clearly a person willing to gamble in this way must be prepared to lose it, as if they were at the race track.

Sometime ago I conducted an analysis of my investment performance over the years. In particular, I wanted to see where the source of my returns are and where my losses are coming from. The finding was an eye-opener for me.

Most of my gains are from stocks that are high-quality, "expensive" and where I have a lot of stakes in because I have done a very deep analysis and have a thorough understanding of its competitive advantage.

On the other hand, most of my losses are coming from companies which I only have small stakes in, lower-quality, "cheap" and stocks that I haven't really performed proper due diligence or companies that I don't really understand.

Since making the conscious decision to alter my investment approach, I find that I make less buy and sell decisions. Most of my decisions are actually "doing nothing", which if you think about it, is actually a decision on its own. By deciding less, I actually prevent myself from doing damage to my portfolio (Let me assure you, I'm very good at damaging my performance!)

This finding corresponds perfectly with Warren Buffett's famous "20 ticket punch card" quote:

"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."


Thanks for the insights. I certainly would have an infinitely smaller experience base to call upon. I wasn't suggesting skimping on due diligence.
Having said that if you were offered those 20 punches - pre or post a few years of investing, learning from ones gains and losses (while trying not to be fooled by randomness), wouldn't you prefer a bit of experience in the bag? I think its also valuable to learn what makes a good and a bad company - not just for investing, but also in terms of running a business/business(es). Sounds obvious of course, but an emotional connection (financial impact) to decisions, is proven to help one remember and learn more, than just theoretical investing or reading.


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Back to SDI,

I believe this has further to fall (although this is clearly a guess) as the ev/ebitda despite the price drop has only dropped marginally (~4.5x, although I’d trust @madamswer revision estimate over mine clearly).

With all due respect to both yourself and @madamswer, I have to discourage this quote of yours.

@madamswer is a valuable contributor in this forum whose opinion I value. We have quite a few common investments. However, there are also many occasions in which I disagree with him, i.e. I invest in something that he wouldn't touch and vice versa.

@Just_a_guy, I believe you should take on board all the input that you get from others in this forum and come up with your own conclusion.

If you have done your homework properly, your estimate of SDI's earnings is as good as anyone's, including @madamswer's.

Yes of course I do come up with my own conclusions, and I was probably being a little blasé when describing someone else's estimates - maybe subconsciously I was trying to tease out his estimates to compare to mine (although for what its worth, from prior comparative experiences he's probably more conservative than I). It would be silly to think one can't learn from others with more experience.

Happy investing!

Thanks you too!