Scott,
Interesting topic, and I think a good one. There are pros and cons on anything, and I feel a lot of times it comes down to each individual investors goals, tolerance for risk, etc. Some of my observations are as follows, are not intended to be investment advice, and are not intended to be critical of other styles of investing. All in my opinion, since my opinion is the only one I have to express.
For starters, I don't think it's practical for a private investor to attempt to duplicate the strategies of professional money managers. It costs me about $20 per trade on limit orders, so the round trip is $40. If I split up my account in 100 stocks, the cost for the round trip on my portfolio would be $4000. If a person had $200K to work with, that means you'd have to make up 2% on commission alone before trying to make up the spread just to break even. On the flip side, if a person is holding the position for many years, the average cost per year would be minimal.
The biggest consideration, in my opinion, is that a private investor just plain doesn't have the time to do justice to solid DD on 100 issues, not to mention you'd likely have to look at 500 companies to find 100 that might look promising. To make matters worse, securities regulation and oversight are close to nonexistent, and GAAP is a joke, so there is no way to make apples to apples comparisons from company to company and sector to sector without taking the time to do some serious numbers crunching by digging through the filings. To be honest, I doubt most money managers go to the trouble they probably should in that respect.
Another consideration is it is next to impossible to beat the market with a diversified portfolio. You'll generally match the overall market's performance over an extended period of time. If the market is up, your portfolio will be up. If the market is down, your portfolio will be down. Diversification is a hedging strategy, but there is a break point where being overly hedged eliminates any possibility of turning a profit. The other side of the coin is the less you hedge, the more market risk you accept.
On a more concentrated portfolio, my view is it's the strategy that has to be diversified. I rarely have more than 5 positions in my account at any given time, and I treat cash as one of my positions. Cash is my hedge and it may be the only position I hold depending on market conditions. I don't consider myself to be a day trader, but I do use a lot of day trading type strategies in what I do. I try to identify situations where most of the downside has been taken out, and the upside has been maximized. I'm normally looking for places where my goal is to take profits in 3 months or less, and my average holding time is probably more like 3-4 weeks. I tend to use both tight stops and cost averaging depending on how the trades looks at any given time. I try to use both under valued and over valued as my price targets and treat a good value on put options the same as a good value on a long stock position. I'll occasionally use index options on timing market events, or try to identify individual issues I consider to be representative of general market conditions or sectors. I like volatility, but not at the level likely to attract day traders, which usually means small/mid caps in the 300K share volume a day range. I like debt to tangible assets at less than .2 to 1, strong liquidity, positive growth, and limited cash burn. I like places where EPS is slightly negative to break even, and the trend is toward profitability, and I try to buy as close to the bottom of the chart and as close to (below?) book value as I can get. And I probably spend at least 3 times more time on researching the market and the economy as I do researching all individual issues combined.
I know it's not Graham or Buffet, but it's what I seem to be most happy with, and I've had a great year while most diversified portfolios have gotten clobbered. I am NOT recommending this as the ideal was to manage a more concentrated portfolio, or even recommending a more concentrated portfolio. It's what I have enough time, energy, money, tolerance for risk and experience to target at this point in time.
Hopefully you'll get some feedback on both sides of the pros and cons, and anyone who wants to point out some of the risks involved in any of the above is welcome to do so. |
