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:

Bonus: The title of this post was inspired by a recent Howard Marks interview on Bloomberg Radio : 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…

4 thoughts on “Are You a Cowboy or Are You a Chicken?

  1. You can call me chicken number 2, because instead of buying many different shares I have put nearly all to Wilhelm Wilhelmsen holdings B- shares. As we can see in the link,

    even the lowest target price is well above the current price and the B- share is yet 10 kr cheaper. Comparing to the rivals or Oslo stock markets by using p/e or p/b values, WWIB is extremely cheap. Only thing or onlyone who seems to be able to spoil the party is mr. Trump with his board adjustment tax, but even so it looks that the company has enough potential growth and capability to improve its profits

    So on these days, when bargaining stuf is hard to find, I would not dare to invest much into many other shares.


    1. I did the same as you recently, Erkki. The WWIB NAV to discount rose about 5% a few weeks ago which led me to increase my already large position. Hard to say what will happen to the individual businesses but the discount gap WILL go down over time, of that there is no doubt. 40-45%+ is just too much (according to some analysts this is closer to 50%) so absent changes in the individual companies there will be an upwards pull for the holding company.


  2. I would say that unless you only have a very small amount of Money in stocks, it is dangerouss to place more than around 20% in a single stock. Yes WWIB may be great (I hope so as I own it), but I wouldn’t make it a 30 or 40 or 90% position. Especially as they are not that Diversified – I mean it practically all about transport of cars and Machinery. If Trump doesn’t play nice I assume it could be vastly affected. And even without Trump – recently the stock traded in 120NOK (now 205NOK), so it is definitely not impossible to loose 40% of the stock value if the market sentiment turns sour again. I have a 5% position and am comfortable with that. It would be different if it was a hugely Diversified conglomerate/fund (like e.g. ECEX, which I had a 30% position in earlyer, but exited as the discount to NAV decreased from 45% to 20%).


    1. Hi Casper, good points. And yes ECEX would definitely be a more diversified play. However, back when the discount was in the 40%+ range (I am assuming this was the fall/winter of 2013? I had a large position then personally) there was also a major drawdown because they had a feeder/master fund structure that had a high 2% cost per year. This has changed in the last couple of years and the discount had come down to less than 25% the last time I checked.

      Wilhelmsen Holding is _mainly_ about car transportation, but the value of WMS division (ship service), Survitec and Qube Holding make up about 45% of the overall value. All are related to world trade though so there is definitely a clear downside if global protectionism kicks in. In their last webcast they did argue there was some upside to be gained though because of their American owned subsiduairy ARC which would benefit from Mexico tolls. But almost certainly the downside on the rest of the business is greater than the gain.

      Overall I’d argue that a 45%ish discount provides a good deal of protection plus a nice upside potential. There is absolutely no reason for it. Many shareholder friendly initiatives have been initiated lately (repudiating the claim that the family doesn’t the share price to increase due to tax concerns) and management seems capable when it comes to capital allocation. I don’t see the discount not coming down to at least below 30% at some point in the not too distant future.


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