Are You a Cowboy or Are You a Chicken?

Do you swing for the fences or is your main focus on not getting killed? And is your assessment of that question even accurate?

Say Hello to a Chicken (I Think)

Personally, I like to think I’m a chicken as my focus is almost always downside oriented first and foremost. However, when discussing position sizing with friends more often than not I get labeled a cowboy as few and large positions is usually my game.

Charlie and I disagree with that! (Hm, for some reason that line felt good. I wonder if Warren gets the same pleasure from it when he says it – which is often…).

A few bets are all you need, but when you find the few, act aggressively. Diversification is for people who don’t know anything. – Charlie Munger

The point of the above quote is that with knowledge comes risk protection. And in my world big bets are reserved for especially safe situations where as many angles as possible are covered through relentless investigation. For me that tends to be investment companies and conglomerates as these are already quite diversified through their holdings in multiple companies and where there is an added layer of safety through an unusually large discount. I rarely take super large positions outside of those types of companies. So in spite of having massive positions percentagewise I would argue that this is in fact a chicken approach to investing, one in which it is hard to get hurt in a big way.

A hypothetical example

Take an example. Which is more diversified: five promising growth stocks or one investment company with an unusually large discount to NAV? More often than not I’d bet on the latter, but a more accurate answer is, of course, that it depends. If you have deep expert knowledge and an intimate feel for the industries in which the five growth stocks operate, preferably through working or having worked in the field, then you may have yourself a near perfect match between diversification and a high expected value situation, supposing the fields are non-correlated. But few of us have this much expert knowledge and on top of that it would require a lot of work.

 Laziness can be riskier than big bets

So risk comes more from laziness than the sizing and the amount of companies in one’s portfolio. And risk can be materially decreased from understanding and being able to identify the type of situations where one can size up with a large degree of safety. More on that in a recent post: https://hammerinvesting.wordpress.com/2016/12/18/the-sizing-of-a-bet-the-art-of-not-blowing-up-while-getting-the-best-of-it/

Bonus: The title of this post was inspired by a recent Howard Marks interview on Bloomberg Radio : https://www.bloomberg.com/news/audio/2017-02-17/interview-with-howard-marks-masters-in-business-audio To Marks devotees, such as myself, it may not contain anything new in terms of substance but ohhh the pleasure of this man’s eloquence! Poetry blended with the sharpness of a Japanese knife…