Book-review: Concentrated Investing (Benello, Biema, Carlisle)

Bet seldom, and only when the odds are strongly in your favor, but when you do, bet big, hold for the long term, and control your downside risk‘  

If you prefer to read the pdf version click here. (links may not work in pdf)

(as in my previous book review I focus more on my learnings/insights/personal summary vs writing style etc.)

The introduction makes the case for a concentrated value investing approach referencing various famous and lesser known successful investors. Investing in 5-10 stocks is not for everybody. The highlights the observation that some investors, despite possessing superior business and investing case analytical capabilities do not reach superior returns. Some investors prefer 5-10, 10-20, 10-30.  

One has to come to own conclusions, no matter what people left and right think and say. Investing based on facts is the goal and leaving an idea if we do not have enough supporting fact is important. I guess limiting the number of positions really helps here to say ‘no’ to many new ideaas that are ‘not good enough’.  

Lou Simpson: The Disciplined Investor: A Portrait of Concentration. His investment philosophy was a highlight (brackets are mine):  

  • Think independently 
  • Invest in high return businesses run for shareholders (great questions) 
    • Does management have a substantial stake? 
    • Is management straigt forward? 
    • Is management willing to divest unprofitable operations? 
    • Does management use excess cash to repurchase shares? 
  • Pay only a reasonable price, even for an excellent business (should be doable with skill, many biz) 
    • P/E, P/FCF are helpful ratios (from time to time these are replaced by … ie eyeballs) 
    • Comparing E/P to government bond yields is also helpful (parallel to Terry Smith) 
  • Invest for the long term (minimizes transaction costs and tax) 
  • Do not diversify excessively (forces me to do what investing truly is: the art of relative selection) 

John Maynard Keynes: Investor Philosopher: The Economics of Concentration 

Changed his investment style from ‘macro’ to fundamental value investing.  

Kelly, Shannon, and Thorp: Mathematical Investors: Concentration Quantified 

About mathematically optimized position sizing. Nothing new but loved the section (see book review). Especially, because so much regarding concentrated investing is based on biases and less on academic studies. Ie, all characters in this book are ‘survivors’ and did well as concentrated investors, at least on negative example who blew up should be included, since, concentration should work well (on average) if an investor has skill – but after how many years can we be reasonable certain that we or sb else is a skillful investor? I think it is many many years and must include various cycles.  

Warren Buffett: The Kelly-Betting Value Investor: Portfolio Concentration for Value Investors 

Sure money tends to be made on quantitative cheap investments. The really big money is made on a few investments with high-probability qualitative insights.  

Calculating position sizes most investors using Kelly criterion forget to take into account opportunity costs and other investment positions.  

Charlie Munger: Concentration’s Muse: Quality without Compromise 

Shift from buying stocks below liquidation value (p<b) to be willing to pay higher prices (p>b) for better businesses, like See’s Candies. The trick is to get more quality than you pay up for in price.  

Kristian Siem: The Industrialist: The Importance of Permanent Capital to the Long-Term Investor 

Deep industry knowledge and experience assured him to concentrate his bets in operational assets and companies. He knew all submersibles (?) and their contracts, market value, production costs and current yields. He war vary of board members deciding on investments simply comparing vs IRRs without scrutinizing assumptions, ie, terminal value inputs.  

Grinnell College: The School of Concentration: Concentration and Long-Term Investing for Endowment 

Sold stakes when they got ‘too big’. They missed out on several occasions, like selling down Intel. Rosenfield: 

  • Do a few things well: do not put a little bit of money into everything looking good, but put lots of money into a few things looking great.  
  • Sit still: patience is a powerful weapon, to be measured in decades, not years.  
  • Invest for a reason: wealth is a means to an end, not an end in itself.  

Glenn Greenberg: The Iconoclast: Simple, Common Sense Research, and Tennis Shoes 

Does not limit himself to one simplistic metric, but likes to look at free cashflow yield (potential if no growth invest). 

Best business is sth like Freddie Mac generating lots of free cashflow but has an investment opportunity that is very high and certain. 

The second best is a great business under a cloud, that can use Cashflows or borrowings to retire shares cheaply. It will shine after the recovery with muhh lower share counts. 

Concentrated investing calls for positions where you can’t lose much but can win a lot. Further, businesses should tend to be more stable and less cyclical, have sustainable competitive advantages, not too much competition, outstanding management that is shareholder return oriented. 

Views Volatility as an opportunity to increase a position as real bargain prices, and to trade around core positions when the get cheap or expensive.  

Conclusion: The Concentrated Investor’s Temperament 

Bet seldom, and only when the odds are strongly in your favor, but when you do, bet big, hold for the long term, and control your downside risk‘  

(Personally I did not like the book too much and would recommend to read Fortunes Formula before) 


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