Munger quote

“We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
-Charlie Munger

What I take from that is that it’s ok to, in fact you must, say no to a few really good ideas that you just can’t wrap your head around in order to consistently say no to bad ideas.

You don’t have to find all the companies that will end up having bright futures. Just find a few that you’re confident do, and ride 'em.



In retrospect, most of my investing mistakes seem to have started with the
phrase “once upon a time” - basically a good story.
And most of my investing successes started with “earnings growth” and
analysis of the economics of the business.



Great quote!

My take would be that you don’t have to have a brilliant insight, you don’t have to understand an industry better than anyone else, you don’t even need to predict the future better than anyone else. You only need to find growing companies that have a good track record and simple to explain material advantage over their competition, and then not over pay.

Or said much more simply, don’t be try to be brilliant, just don’t be stupid…

Happy 4th of July weekend everyone!



Hi Bear.

Charlie Munger: " It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Bear: “You don’t have to find all the companies that will end up having bright futures. Just find a few that you’re confident do, and ride 'em.

With all due respect, Bear, I think you are adding a thesis that “concentration is good” on top of what Munger said, which to my eye is agnostic regarding concentration or diversification.

I think Mr. Munger is saying, “Get the basics right, and the rest will follow.” If you’re looking at 1,000 companies, and you can narrow that down to 100 based on solid fundamentals, are you being “too intelligent” by trying to concentrate on your top ten and ignoring the other 90?

It is quite possible that I am wrong about this, but I suspect that most of us could look at the S&P 500 and choose 100 of its constituents that would outperform the other 400 over the next ten years. They wouldn’t ALL have to beat the S&P 500, but “Your 100” would have to beat the S&P 500. As I said, I think many of us could do that, given the long time horizon and our knowledge of long-term trends.

But if you had to choose only ten out of “Your 100”, how confident are you that most of the ten would ultimately be the best performers out of the original 100 (or 500)? Of the ten best in “Your 100”, if you picked five of them for your top ten, I suspect that would be stellar performance. Four would be quite good. Three would likely work. Two might be acceptable. One or zero would likely be problematic.

Let’s look further… I’ve seen commentary on this board that basically questions, “Why would you put any money at all in your tenth-best idea?”

If you ranked your ten best ideas today, how confident are you that – some number of years from now – the end result will resemble 1, 2, 3, 4, 5, 6, 7, 8, 9, 10? Experience has taught me that I should have near-zero confidence in that ranking, but overall I haven’t done badly with my choices. Your mileage might vary, of course. We all have different skills. Sometimes it’s my lower-confidence picks that yield the best results.

So, I understand Mr. Munger’s suggestion as, “If the basic rules of investing tell you that a certain company is likely to succeed, invest in it. Otherwise, don’t. And certainly don’t over-think it.” I don’t hear any admonition to concentrate, or to refrain from concentration. Bear (or anyone else), if there’s something that I’m clearly missing, I hope you’ll explain it, but I’m fairly confident (based on the snippet you provided) that you’re adding your biases regarding concentration to what Mr. Munger actually said. If anything, I’d argue that “too intelligent” tends towards concentration while “not stupid” casts a broader net. But now I’m probably imposing MY biases…

Fool on!
Thanks and best wishes,
See my holdings here:
Peace on Earth


I like to run the math. If you own 10 companies, and one goes to $0, bankrupt, you have lost 10% with that company. I lose more than 10% in a day some days, so I am sure that is volatility anyone can live with.

If you increase that number to 100, then you have lost 1%.

Turn it around, and if 1 company goes up 100%, that company has gained you 10% portfolio gain if you own 10 stocks. It is 2% if you own 100 stocks.

That is holding all the other stocks at status quo.

Given this, I don’t see why you gain that much material diversification by holding 100 stocks versus 10 stocks. And as Buffett has said, if he had only $1 million to invest, he would invest in his 5 best stocks. Given this, I don’t think Munger was talking about investing in his 100 best ideas.

In fact, I doubt most people could come up with 100 best ideas. And if you own 100 stocks, why don’t you instead save yourself the time and effort and just invest in a mutual find or index fund?

Here, on Saul’s board, we talk about multiple investing styles. All of them have merit. But in the end we talk about quality investments. And how owning quality investments can beat the market for you. The larger your portfolio, the closer to the market average you will become. Just the rule of averages. Lynch was required to own a lot of stocks when he managed funds. He has shown that owning a ton of stocks can be done while still kicking the markets butt. But even Lynch held his top ideas with much higher concentrations despite having to hold many stocks from those that were not his top idea.

For me, I don’t know how you can properly identify and manage more than 10 or 15 ideas at a time, when you don’t have a staff, you have a life, and you are investing for the long term. What do you gain in security by buying that 11th or 16th stock, much less than 55th or 99th stock?



Oh my goodness, Tinker!

I’ve had my own rants on that topic before, nevertheless I saved your post for the future because it was well done. Thanks.

Obviously, it makes sense to you and me (and some guy named Munger…and some others…heh), but it doesn’t make sense to those who love to have their own mini-mutual fund. I don’t understand it, probably never will… and I’m glad I’m not accountable to anyone for those who tread that path. Nor am I interested in any debate on it any longer.

That being said, I own quite a few companies (30, per my profile). But 90% of the assets are focused on a few. Inconsistency. Often, a mark of the human condition. :wink:

He is no fool who gives what he cannot keep to gain what he cannot lose.

What do you gain in security by buying that 11th or 16th stock, much less than 55th or 99th stock?

I don’t know, you might want to ask Munger. Or Buffett.

Their holding company, Berkshire Hathaway owns partial interest in 45 publicly traded companies. And 64 wholly owned ones.

Just saying’…

PS: Warren’s & Charlie’s personal accounts hold many times that.


It is possible that we are taking out of context the multiple statements made by Buffett and Munger that for example held Coke at 33% portfolio concentration at one point, as an example. They still could have held 100 different stocks, wit Coke 33% of the port, which is not a lot different from holding 1 good mutual fund and one stock at 100%.

I think we need to know at what concentration they hold their shares.

Also, there are points in time when you just have to hold a certain stock at a much higher concentration. Like Buffett did with Coke, as an example. But at other times, it is time to not do so.

As an example, I held QCOM and ARM at 50% each during the 3G build out. I would not do the same with QCOM post 3G build out.

So I think the best we can take away from it, putting Peter Lynch into the equation, is that the amount of stocks you need to hold to be comfortably diversified can vary greatly. And that even a portfolio with lots of different stocks can still act as if it were less diversified by varying the concentration of its favorite holdings, when the time is right to do so (i.e., such as holding Coke at 33%, or QCOM at 50%, no matter how many other stocks you hold to make up the remainder of your portfolio), and then reallocating concentrations in your portfolio when the time is proper to do that as well.


Hi Tinker.

I think we’re going to end up agreeing to disagree as to whether concentration or diversification is “better”. I’m not trying to argue with you that your choice is somehow wrong. You’ve chosen a style that suits your temperament and I’ve chosen a style that suits mine. I think this board’s readership has a diversity of experience levels, skill sets, and temperaments, and I’m trying to present an option that is different from yours and Saul’s.

You said: “I lose more than 10% in a day some days, so I am sure that is volatility anyone can live with.

I agree with this statement in theory, but not in practice. Everybody SHOULD be able to live with a 10% market swing. If you need the money in the near-term, it shouldn’t be in the market, vulnerable to 10% swings in valuation. If you don’t need the money in the near-term, then don’t worry about the swings - they come with the territory of being invested in the market. The market has proven itself to be a generator of wealth over the long-term, so let the long-term take care of itself. That said, I think that many people DO get queasy when 10% drops (or worse) occur. That’s why (or at least one of the main reasons) financial advisers coach their clients to diversify into bonds - they help smooth market volatility (at the cost of lessened returns. A broadly-diversified stock portfolio allows me to capture market returns (and maybe a bit better if I’m smart with my security selection). But it also smooths a good deal of the volatility that a concentrated portfolio encounters. I don’t dilute my stock returns by holding bonds, but I’m not sure that I’d sleep well having a concentrated portfolio, regardless of how logical my “ignore the swings” theory is. Not everyone can handle volatility with aplomb. I’m good at handling some, but probably not as good as you are when it gets to be “a lot”, a term we all need to define for ourselves. Studies by at least one mutual fund company (sorry, no link) show that the average shareholder in a fund doesn’t get all of the fund’s published returns. Why? Too much selling after markets have declined and too much buying after markets have advanced. Steady holders get the published returns.

To paraphrase you, “If you own X companies, and one goes…” I’m not focused on what one of my companies does. I care what the portfolio does. I’d rather own 100 stocks (I own shares of 82 distinct companies today - some of my holdings include a couple of share classes) of companies that I think have a good chance of success, than 10 companies that I think have a great chance of success. In my experience, my best performers often come from outside the ones in which I have the highest conviction. So it makes sense for me to diversify. For someone who finds that stock returns align well with their level of conviction, that person should absolutely concentrate - it would be dumb not to. My point is that it is important for each of us to know our strengths and weaknesses as investors, and choose a style that takes best advantage of the strengths and minimizes the damage caused by the weaknesses. Strengthen the weaknesses over time, if you can, sure… But choose a style that aligns well with who you are as an investor. I’m not pointing to any individual here to say they’ve made a bad choice for themselves. I’m putting another option out there and it may resonate with some. Or maybe it won’t – the people drawn to this board are more likely to prefer concentration. But I especially want beginners to recognize that it is not the only way to build wealth.

… why don’t you instead save yourself the time and effort and just invest in a mutual find or index fund?

Most mutual funds don’t offer returns that beat the market. There are many reasons for this, including the fees that they charge (often 1% of assets under management annually – if the fund gains 10% in a given year, they keep one-tenth of your total return). Furthermore, by holding individual securities directly, I am in greater control of my capital gains tax situation. When you own mutual funds, you’re subject to the distributions they’re required to make, often because other shareholders have entered and exited at inappropriate times, as mentioned earlier. No thanks. Plus I ENJOY following my stocks. My stocks helped me retire at age 55. That gives me more time to invest in their “care”.

What do you gain in security by buying that 11th or 16th stock, much less than 55th or 99th stock?

Knowing my strengths and weaknesses, I’m allowing 55 or 82 or 99 stocks to present me with an excellent return. If only one stock in twenty is going to turn out to be excellent, then I have a decent chance at having two or three of them in my portfolio of 55 stocks, and maybe five of them in my portfolio of 99 just by sheer luck. With good skills, maybe I can improve the number to six or seven or even eight, but I’ll probably have a handful if I’ve avoided the dumb choices that Mr. Munger (remember Mr. Munger?) advises us to avoid. If I have a portfolio of ten (or fewer)… The chances are diminished that I’ll benefit from luck at all.

One more point before I get into specifics.

Not all ideas take the same amount of time to gestate and turn into great investments. By diversifying, I allow myself to be patient with good ideas that just haven’t come to fruition yet.

My top five holdings today are EXEL, NVDA, IPGP, MDT, and ISRG.

Exelixis is a relatively small biotech that I admittedly bought too early. I studied it well and made multiple purchases, all too early. My cost basis is a little under $6. A few years ago, it spend a lot of time under $2. When I bought them, they had no drugs approved. Early on, they got FDA approval for a drug, but it was for a relatively rare cancer. Management thought this drug could succeed against more prevalent cancers. They put a lot of effort into trials for prostate cancer, which failed, putting the company’s viability in doubt. More recently, the stock is trading above $20 due to regulatory approval in kidney cancer, promising results in liver cancer, and a partially-owned second drug that got approval in treating melanoma. My multiple purchases and zero sales show that this was a high-conviction choice for me. As of today, it has turned out well. But that wasn’t always the case, even a few short years ago. I’m not sure it would have made my top-ten high-conviction holdings in the years when its viability was in doubt. Concentration probably would have led me to sell it. Diversification allowed me to continue holding it.

NVIDIA is no stranger here, and I’ve commented on it here before. I bought it in 2004, but by 2013, I was no longer confident that it was a great choice. I was contemplating selling, but they introduced a dividend, which stayed my hand. What a mistake selling NVDA in 2013 would have been! I’ll take some credit for making an OK pick in the first place. But I think it is companies like NVIDIA (or, more precisely, MY EXPERIENCE with NVIDIA) that make me want to have a portfolio diversified enough that luck is allowed to play a role. I mostly got lucky by not selling.

IPGP is an integrated manufacturer of fiber LASERs. I bought in 2007 and again in 2011. In 2007, I realized that fiber lasers were disrupting other types of lasers (mainly CO2), and I wanted in. In 2011, I had some experience watching the stock’s price movement, and I was able to obtain a good entry point. Growth has been unspectacular by Saul’s criteria, but perfectly acceptable by mine. My first purchase was at around $19 and the second at $35. It trades over $140 now. It is possible that this company would have consistently been among my highest conviction choices, so I probably would have held it regardless of concentration or diversification. This probably also explains my researching an obscure laser industry publication during our AAOI discussions.

I purchased medical equipment designer and manufacturer Medtronic in 1994. It proved itself quickly to have been a good choice, although its growth subsequently stalled. Unlike all the others I’m mentioning today, this was in a taxable account, so tax consequences helped me keep holding. Growth resumed after a relatively-recent management change. For many years, Medtronic was my largest holding. When Medtronic underwent its inversion, merging into Ireland-based Covidien, capital gains taxes were forced on me. I sold half of my holding the year before the inversion (and kept the other half) to spread the taxes over two years. With such a long holding period, my cost basis was mid-single-digit. While growth was stalled, I doubt Medtronic would have made my high-conviction cut, and it would have been sold from a concentrated portfolio, probably missing the gains that occurred after the management change. This is another example of why I’m glad I don’t concentrate.

Finally, Intuitive Surgical makes the tools used for most robotic surgeries. I made two purchases around the same time I was buying my Exelixis shares - the middle of the prior decade. After a few years of nice gains, ISRG stalled between 2012 and mid-2015. I probably would have sold it from a concentrated portfolio while it was doing nothing, but it has doubled since September 2015. I probably would have missed those gains if I had sold it.

So… You tell me… Am I relying on luck, or setting myself up so I can benefit from luck sometimes?

Obviously, I’ve focused my discussion here on my winners. I’ve certainly had my fair share of losers. But they never really sting so much because they start small and generally don’t grow from there.

One final point before I close…

I build my portfolio over time. For any particular holding, I evaluate it after holding it for a while and place it one of three buckets. At the extremes, I may decide I’ve made a mistake and sell. Or I may decide that the size of my holding is dwarfed by my conviction about the holding, and choose to add more, seeking another good entry point. I got away from that second strategy for nearly a decade, but revived it as I studied this board and soaked in Saul’s strategies, seeing which might fit best in my investing scheme. So, thanks for that, Saul. Most companies however, will fall into the “do nothing” middle bucket. It is possible that my returns might improve if I were to be more aggressive about utilizing the “buy more” and “sell this dog” buckets. But my experience tells me that – at least for me – I shouldn’t get too aggressive about it because some of my biggest winners were still in my portfolio because, at many points along the line, I did nothing with them. Yes, my portfolio can get bloated with holdings, but as long as the bottom line gets bloated too, I’m a happy camper.

I hope this helps someone, although it probably only works for someone whose skill sets and temperament are like mine. The key point, I think, is to know oneself and invest using a style reflecting that knowledge.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: EXEL, NVDA, IPGP, MDT, and ISRG)
See my holdings here:
Peace on Earth


There are many things I do on the rare occasions when a company manages to get through my rigorous screens and DD and excitingly appears to be a definite buy but one thing I never do is count my existing investments! This is a strange and irrational preoccupation that seems to come up on TMF all the time. Not the least of the irrationality is that the company’s share price offers good value now and it is quite possible, or in this market even likely, that the existing investments no longer do, or maybe less so.

I am trying to think of an analogy: a man is walking along the road. He sees a ?. A little further he finds another ?. Eventually he has 15?s. But then he finds one more. ‘No!’, he says to himself. I will leave it on the road, despite its value! I have got 15 ?s and that is quite enough!'.

1 Like