Friends,
Are you familiar with Joel Greenblatt? He's one of the greatest investors of our time. You might not hear his name mentioned with the same reverence as Warren Buffett, but it's mostly because his track record is "only" two decades long -- instead of the lifetime that Buffett has accumulated.
In fact, the chart below shows just how outstanding Greenblatt was -- beating the S&P 500 by 27 percentage points per year for twenty years!
Recently, Greenblatt talked about the most under-appreciated part of investing: position sizing. Specifically, he talked about the two biggest mistakes investors can make:
Not betting enough on the big winners
"Being too timid on the few good ideas that come your way is the biggest mistake people make."
Betting the most on ones that WON'T be the big winners
"The biggest positions I've had are not my best ones...I will size the position larger if I don't think it can lose much money."
This is a fascinating juxtaposition. Greenblatt doesn't want his best position -- even if it's highly volatile -- to be just a 1% position. He'd rather have it much larger so that when it succeeds, it really pushes his returns higher.
At the same time, he won't make that very same stock a 10% or 20% position right off the block. For those, he's more interested in a company that might be an underpriced stalwart.
This is advice that I (Stoffel, here) have taken to heart. Currently, 27% of my portfolio is in cash, and 11% is in Amazon. That's 38% of my portfolio that I decidedly do NOT expect to produce multi-bagger returns.
At the same time, in years past, I might have been timid (a ~1% allocation) with a position like Rocket Lab. But after spending weeks on due diligence, I thought the risk-reward was quite favorable. I'd never make it a 10% position, but I was fine giving it a 5% allocation. That's been a favorable move this year, with the stock up over 70% this year.
Greenblatt's approach is a nice mix that's focused on the long-term outperformance: protecting one's downside with their largest positions, while exposing themselves to uncapped upside with their mid-level holdings. It's one that's worth considering in your own portfolios.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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