In the UC
Davis class discussion, Mohnish Pabrai mentioned how he switched from a 10x10
model of position sizing (10 positions of about 10% each) to a more diversified
model after the 2008-2009 crisis. He then went on to discuss how he has
switched back and what he thinks the real lesson to learn was (the quote is my
transcription and not an exact quotation, so errors are mine….the discussion on
position sizing began at the 42:40 mark of the video):
“In
hindsight, I think the correct lesson to learn from 2008-2009 was to hold cash.
And I didn’t have cash at the time….I have now gone back to the 10% allocations
that I had done for most of my investing career, with the caveat that I always
want—except in times of extremely severe distress—to [not] be fully invested.
And so for example, as I talk to you today, I’m sitting on plenty of cash….It
is an interesting market right now. There are very few bargains around, but the
bargains we have been able to find are wildly undervalued, so it actually lends
itself very well to be a concentrated investor. I could not today come up with
20 stocks that I thought were undervalued, but I could easily come up with 5 or
6…I think the game is just perfect for me to play with a concentrated portfolio
and holding cash. So that’s where we are, and I think it’s the way to go. I
think Munger always says that a well diversified portfolio just needs 4 stocks.”
Guy Spier mentioned that
he thinks Mohnish is right, but that there are two good reasons to be less
concentrated: 1) being congenitally more fearful and risk averse (i.e. internal
comfort); and 2) having a relationship set up with your investors that makes it
proper to be more diversified.
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Related: For Seth Klarman’s thoughts on position sizing, see
the bottom paragraph HERE.