Devil’s Advocate: Adding More to Your Top Choice
A couple of days ago a friend sent me this passage in a book he was reading:

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I think Buffett is very wise. And I agree with him, for the most part. But to play devil’s advocate:

One reason to add a 20th position would be humility regarding just how surprising the future can be and how badly you could be wrong about your top choice, let alone your top 10 choices.

I have a hard time looking at even my favorite choices and saying “I’m 90% sure this will go up.” I feel like the companies I am most excited about I feel more like “I’m 75% sure this will go up.”

If I find 20 companies that I’m anywhere between 70-75% sure they will be good investments, I’d rather spread it out between those 20 rather than dump it all into one.

Not to argue with Mr. Buffett, he has 60 years of experience on me 🤣

I guess another way to say it is “the standard deviation of my conviction distribution is small.”

I don’t have many outliers that I have vastly more conviction for.

When all your ideas are grouped together, I think it can make sense to spread the risk out.
“When all your ideas are grouped together, I think it can make sense to spread the risk out.”

This is true, but this is also the point where investing strategy overlaps with investing psychology. At some point diversification becomes dilution. We all know our biggest returns will most likely come from our best ideas. The question is how many ideas becomes too many? The most successful investors have consistently stated they believe less is more. It is about challenging yourself to find the fewest number of holdings that lets you sleep at night. This is worth the read:
Nathan Worden's avatar
Great point and thanks for the link!

For you personally, how do you answer the question of "How many ideas becomes too many?"

How many positions do you try and hold yourself to?
Nathan Worden's avatar
Sheepishly realizes I can answer the question myself by checking out your great substack at:

The answer is 9!

So I guess my follow up question would be:
Is there some other anchor you have for safety? Looks like your portfolio has essentially no cash. Presumably your whole net worth isn't tied up in these 9 companies, but maybe it is?
Actually, it's 8 right now with about 10% cash after some moves this month. As you mention I prefer being fully invested, so I’m still working through it. This portfolio represents our entire net worth outside home equity and 401k’s (which I would gladly put in the same stocks if I had that option).

The “anchor of safety” you mention is more subjective. I would assume many define this anchor as what asset you use to protect capital. I am still at the stage I am solely focused on growth. I guess my anchor at this point is continuing to hone my process and putting in the time to stay current enough on our holdings to be nimble as needed. We all crave 100% safety, but the truth is we are all at the mercy of however much risk avoidance we build into our process. The only way to 100% avoid losses is to sit out the market.
Nathan Worden's avatar
Wow, that is high conviction. Have you ever had debates with financial advisors who try and scare you with the 'fear of the unknown' arguments? I'm sure a lot of the quotes from the link you posted above would come in handy then!
Occasionally. Sometimes it's simple math. The alpha above the market for many on these boards would still be miles ahead of the indexes even with a 30%, 40% or 50% pullback. That kind of cushion makes it much easier to weather the storms. I'm not saying it is easy, but I would think many that far ahead of the market would generally agree.

I'd also counter the "fear of the unknown" argument with "control the controllables". Money managers use fear to convince you to accept lesser returns while they collect management fees. The only things investors can control are the companies in their portfolio, the amount they allocate to each and the amount of time they spend trying to improve their process. The rest truly is just noise.
Nathan Worden's avatar
Thats a great way to counter the "fear of the unknown" argument. There is simplicity in how few things there are that can be controlled.

I like that perspective. Thanks for sharing!
The other thing you can do is ask the financial advisor to show you his or her track record against the market. That usually causes a change in subject. :-)
Nathan Worden's avatar
🤣 I just had a conversation with a Personal Capital advisor last week and when I asked about his track record, he said "Our goal is not to make comparisons, our goal is to get you to your ideal retirement"

...not confidence inducing.