Re-discussion on "centralization or decentralization"

Regarding the questions raised by customers, such as "centralization or decentralization" and "it is best to hold several targets", here is a unified reply. The so-called centralization or decentralization lies in a "degree" problem. I saw an article that took five as the dividing point, with concentration below five and dispersion above five. Buffett suggested holding 5- 10, and Munger thought it was enough to concentrate on investing in three companies. It can be seen that there is no unified standard to divide "centralization or decentralization" according to the number of locations.

I don't think investors need to be confused by these appearances. Many times people are often troubled by their own obsession. How about three? How about five? 10? It is important that we should know how to approach "right". We must know that it is difficult to stop at the best investment, and we can only pursue "fuzzy correctness" in uncertainty.

By studying the investment portfolios of the masters, I found some similarities. The correct approach here is not to measure concentration or dispersion by the number of positions, but to use the concept of "concentration". Take Buffett as an example. His top five heavyweight stocks account for 70%-80% of the funds, and the total number of shares held by * * * does not exceed 10. Charles Munger is more exaggerated than Buffett. He said in a simple and clear style: "For those who adhere to the concept of centralized investment, three companies are enough." It turns out that the standard deviation of his portfolio is indeed much higher than Buffett's.

Evolution from decentralization to centralization

There is no doubt that Buffett is the most successful investor in the world today. Everyone knows that he studied under Benjamin Graham, but what you may not know is that Graham advocates diversification. Buffett once said, "I am 85% Graham, 15% Fisher", which shows how much influence Graham has on Buffett. We know that Buffett advocates centralized investment, so some people think that the difference of 15% between Buffett and his mentor Graham is reflected in the view of "centralization or decentralization".

Not exactly, but "centralization or decentralization" is the main difference between the two. As Graham's most proud disciple, Buffett has won the essence of his mentor's value investment strategy through Graham's years of teaching and learning. Later, Buffett realized Graham's lack of bargain-hunting methods in his investment practice, and under the influence of his good friend Charles Munger, he began to absorb Fisher's long-term investment strategy of investing in growth stocks of excellent companies.

After reflecting on the shortage of "cigar butt" investment, Buffett reduced the number of positions from more than 40 in the 1950s and 1960s to less than 10 in the 1990s. At this time, the scale of assets managed by Buffett has been greatly improved. In general, considering the impact cost and capacity of the market, a more diversified investment strategy should be adopted for large-scale investment. In fact, Buffett at this time has shown obvious differences from his mentor in "centralization or decentralization", or has evolved.

The correct path of concentrated investment

Over the years, Warren Buffett has formed his own centralized investment system. It should be emphasized that Buffett's centralized investment system is only applicable to those investors who have the ability to distinguish what is a really good company and have a certain foundation of securities analysis. For novices and amateurs, it is recommended to adopt diversified investment strategies.

1. First, you need to find an excellent company.

It is not easy to analyze the intrinsic value of a company, but it takes a lot of effort. Choose a company with excellent long-term performance and stable management. These companies have been able to win in the past and will certainly produce high performance in the future. This is the core of concentrated investment: concentrate your investment on companies that are most likely to produce above-average performance.

2. Then make a big bet on high probability events.

Anyone who plays poker should understand this truth: when the situation in the poker game is favorable to us, make a big bet. In the eyes of many authorities, there is not much difference between investment and gambling. They all use the principle of probability to make the optimal decision. Kelly formula provides a theoretical basis for concentrated investment, and it uses the probability principle to calculate the optimal investment ratio. The biggest advantage of Kelly formula is to maximize long-term value-added without bankruptcy risk.