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Old 03-28-2009, 10:54 AM   #21
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I'm thinking about keeping 25-50% in the one publicly traded company that I think I know enough about.
Wow.

I'm of the view that an external observer (or even an insider) can't possibly know enough about a company to take that kind of risk.
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Old 03-29-2009, 08:33 AM   #22
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Americredit? AutoNation? CarMax?
Berkshire Hathaway

Quote:
I'm of the view that an external observer (or even an insider) can't possibly know enough about a company to take that kind of risk.
You are probably right, and it is certainly not the recommended AA. I had been trying to diversify out of Berkshire the last few years, but the net effect of that diversification has been negative so far compared to Berkshire's returns and so my BRK percentage is still very high. I diworsified in other words.

I guess the reason my risk tolorance has been so high is because I've never had a real job but always worked on commission or owned a business. When I owned the business all my eggs were in that one basket and it paid off pretty well (except for my exit strategy). I funnelled almost all of the profits of the businness into Berkshire over the years and that has paid off pretty well. So, I guess old habits are hard to break, but now that I'm not working I am having second thoughts about blowing myself up.

If Berkshire failed and I had 50% AA would it blow me up? Yes. Well, it would blow retirement up and I would have to go back to work.

25%? I think I can cut expenses to still stay in ER at this level.

How could Berkshire blow itself up ?
1. Sell a bad reinsurance policy-- they actually did this back around 911 when they realized a large policy didn't have WMD disclaimers on it so that was scary.

2. Next management team is ineffective-- I don't think they will hire someone stupid, but they could certainly become arrogant or ineffective over the years so there is risk over time they may not do well so the new team would be on a short leash.

3. Warren/Charile die-- that is certain to happen and while it will cause ST price pressures it will not IMO kill the company unless #2 above happens. May see a dividend goinig forward with new management if they are unable to spot good uses for capital, which would be fine with me.

What are the odds Berkshire will totally blow itself up? 1-5% maybe?

I wonder what the odds makers would have said about Lehman, Bear, et al about blowing up in comparison to Berkshire. Their balance sheets were way overleveraged compared to Berkshire's, and the risk model they used, VaR, ( Yappa Ding Ding: Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis) focused on the 95-99% of the time the system did work but ignored the 1-5% when it didn't work. Much of the probability and statistics work—for instance, Monte Carlo simulations like in Firecalc—are based upon thousands and thousands of spins of the wheel. But if you kill yourself that one time, you can’t spin again.

In the current crisis, it has turned out that the unlucky outcome was far more likely than the backtested models predicted. What is worse, the various supposedly remote risks that required trivial capital are highly correlated; you don’t just lose on one bad bet in this environment, you lose on many of them for the same reason. This seems to be what happened to the traditional divirsification across different asset classes-- the different classes were actually closely correlated and the entire portfolio went down. I guess my point is if you divirsify across different asset classes according to standard theory but you really don't understand the correlation because you really don't understand what's in all the asset classes, then you could be in trouble in times like we are having now.

So yes, my underdivirsification is a risk, but hopefully one I can quantify so it doesn't blow me up.

Thoughts?
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Old 03-29-2009, 10:03 AM   #23
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Originally Posted by cardude View Post
Berkshire Hathaway



You are probably right, and it is certainly not the recommended AA. I had been trying to diversify out of Berkshire the last few years, but the net effect of that diversification has been negative so far compared to Berkshire's returns and so my BRK percentage is still very high. I diworsified in other words.

I guess the reason my risk tolorance has been so high is because I've never had a real job but always worked on commission or owned a business. When I owned the business all my eggs were in that one basket and it paid off pretty well (except for my exit strategy). I funnelled almost all of the profits of the businness into Berkshire over the years and that has paid off pretty well. So, I guess old habits are hard to break, but now that I'm not working I am having second thoughts about blowing myself up.

If Berkshire failed and I had 50% AA would it blow me up? Yes. Well, it would blow retirement up and I would have to go back to work.

25%? I think I can cut expenses to still stay in ER at this level.

How could Berkshire blow itself up ?
1. Sell a bad reinsurance policy-- they actually did this back around 911 when they realized a large policy didn't have WMD disclaimers on it so that was scary.

2. Next management team is ineffective-- I don't think they will hire someone stupid, but they could certainly become arrogant or ineffective over the years so there is risk over time they may not do well so the new team would be on a short leash.

3. Warren/Charile die-- that is certain to happen and while it will cause ST price pressures it will not IMO kill the company unless #2 above happens. May see a dividend goinig forward with new management if they are unable to spot good uses for capital, which would be fine with me.

What are the odds Berkshire will totally blow itself up? 1-5% maybe?

I wonder what the odds makers would have said about Lehman, Bear, et al about blowing up in comparison to Berkshire. Their balance sheets were way overleveraged compared to Berkshire's, and the risk model they used, VaR, ( Yappa Ding Ding: Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis) focused on the 95-99% of the time the system did work but ignored the 1-5% when it didn't work. Much of the probability and statistics work—for instance, Monte Carlo simulations like in Firecalc—are based upon thousands and thousands of spins of the wheel. But if you kill yourself that one time, you can’t spin again.

In the current crisis, it has turned out that the unlucky outcome was far more likely than the backtested models predicted. What is worse, the various supposedly remote risks that required trivial capital are highly correlated; you don’t just lose on one bad bet in this environment, you lose on many of them for the same reason. This seems to be what happened to the traditional divirsification across different asset classes-- the different classes were actually closely correlated and the entire portfolio went down. I guess my point is if you divirsify across different asset classes according to standard theory but you really don't understand the correlation because you really don't understand what's in all the asset classes, then you could be in trouble in times like we are having now.

So yes, my underdivirsification is a risk, but hopefully one I can quantify so it doesn't blow me up.

Thoughts?
Good post. You clearly understand what you are about, and understand the risks.

Tax consequences of various strategies can be important. If you have been buying BRK for years, you likely have a great deal of embedded capital gains. This makes any move out of that stock expensive. If you are still confident in its future, all you have to do is peel off a few shares from time to time. But a big sale to get more diversification could cost you a lot. At least with Warren you have honestly, and you and he are on the same side of the ball.

Similarly I favor trying to look ahead during mid-career, and setting up a portfolio of growing dividends. If you are successful, you have no "accumulation/distribution" phases, just a time when you are re-investing dividends, and a time when you are using them to live. This changes the game from seeking portfolio growth, which will then be sold off to pay bills, to seeking a growing income stream. This latter is not necessarily easy either, but since it is somewhat different from what most portfolio managers are seeking, there is less competition.

I believe that a large risk which is currently being underbid is inflation and rising interest rates. True, as long as the world economy is dead there may not be much, but even that is not really sure. I believe that I read in FT recently that last month the UK annualized rate of their version of CPI was >3% year over year.

As I see it, no rule of thumb is much use right now. It really boils down to pay your money, and take your choice.

Regarding risk tolerance, IMO the only way to take risk out of the act of living without paid labor is to log in your years at Uncle Sam's. Many of the retired guys I know are living off some land contracts, or maybe the paper from financing sale of a gas station or other mundane small business.

The way I look at it, compared to these guys my modestly concentrated portfolio of mostly well financed stable businesses looks pretty good. And, although I have been divorced since retiring and also got hit pretty hard in the '07-'08 downdraft, I'm still swimming and staying clear of the kelp beds.

Ha
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Old 03-29-2009, 05:25 PM   #24
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This Might Help or add to the confusion..From Jason Zweig-WSJ


"If you'd invested $10,000 in a 50/50 mix of stocks and bonds in December 1993, you'd have had $24,419 by December 1999. Then it was almost straight downhill; by September 2002, you would have had $19,240 left. Rebalancing would have yielded almost the same result. That's because bonds went up almost every single month over that period, while stocks kept crashing. After 2002 came another long upswing and then the recent brutal drop. How would this have affected your original $10,000 invested in 1993? If you rebalanced annually, by this February you still would have had $24,967 left. That is $4,000 more than if you had been 100% in stocks all along and $2,400 more than if you had invested your money 50/50 and never touched it after that."

If I had Rebalanced After every Bull Yr btwn 03-07? I would have Bought More Bonds and Less equities.. and earned 88% Less over all.. Funds/Sectors Run on a bull Run an average of 36 mos.. and it's best Not to Reduce them ( rebalance) until then.. I rebalanced in 06' mostly due to both " Market Sentiment" and Price Evaluations ( way over valued) in most Asset classes/Sectors.. from Reits to Int'l to All the Caps..

and am Not Rebalancing just yet and buying Buying More equities.. Just yet.. stocks/indexes are Low for a Reason and I let the Pro's tell me when they are worth more
the Only Rebalancing might just be due to your Age..starting with a 60/40 and increasing your bond Allocations by +1 to 2% every yr, depending on if your saving enough to begin with or not..

a 50/50 port Made 3% less than a 70/30 but a 70/30 had a 68% higher downside risk. Unless your Dealing with Mid to High 6-7 figures of savings? Is it really worth the risk? Vs just add another 10% to your savings to your 50/50 port to make that same Dollar value and you'll be able to Sleep better..


>I do a Comparision of Rebalance vs Not Rebalance every yr for past 11 yrs.. The difference btwn the 2? the Non Rebalanced Port made about 1% more apy ..
And I think Rebalancing so much is A Consipiricy by Wall Street.. to generate more Fee's..Just about everything those guys say is always to promote more $ for them in the Bottom line or Hidden somewhere..The gains made from Rebalancing was eaten up by fees as well.. Of course, It all depends on your Portfolio of Investments too..
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