#WisdomWednesday Day 2 and the Power of Concentration

Get conviction. Go big.

Nov 29, 2023

It’s #WisdomWednesday here at Make Money, Make Time!

In this article I’ll teach you teach you some key lessons on how to become a better investor so that you’ll retire well before you’re 65.

1 Key Investing Lesson

Part of the reason I have been so successful in my investing journey so far is because I study other investors who have had lots of success.

I will never invest into a company solely because, say, Warren Buffet has invested, but it sure is a nice catalyst to start a deeper dive into a stock when someone like Buffet has high conviction in a stock.

Today’s lesson therefore encourages you to study other investors portfolios and investing principles.

One key piece of information you can learn from some big name investors is that when they have conviction in a stock, they aren’t afraid to make big bets on them.

I’m a big believer in the famous quote by Buffet:

“Diversification is a protection against ignorance. It makes little sense if you know what you’re doing.”

Ultimately, you build wealth with concentration, and maintain wealth with diversification.

Here’s 10 investors who have made enormous bets on single stocks:

Bruce Berkowitz - 88% of his portfolio is in The St. Joe Company ($JOE)
Mohnish Pabrai - 68% of his portfolio is in Alpha Metallurgical Resources ($AMR)
Carl Icahn - 57% of his portfolio is in Icahn Enterprises ($IEP)
Francis Chou - 57% of his portfolio is in Berkshire Hathaway ($BRK)
Warren Buffet - 50% of his portfolio is in Apple ($AAPL)
Charlie Munger - 41% of his portfolio is in Wells Fargo & Company ($WFG)
Nelson Peltz - 41% of his portfolio is in The Walt Disney Company ($DIS)
Clifford Sosin - 37% of his portfolio is in Carvana Co ($CVNA)
Dennis Hong - 31% of his portfolio is in IAC Inc ($IAC)
Li Lu - 27% of his portfolio is in Bank of America ($BAC)

Knowledge of this should lead you to 2 main realizations:

Don’t diversify too much: All you’re potentially doing is leaving life changing returns on the table. If you’ve done the research, you like what you see, and there’s a good margin of safety then go for it.
Deep dive: The second thing that came to my mind was, why did these investors invest into these companies? Some of them are potentially worth a deeper dive of my own (see next section).

1 Investment Idea

Bank of America ($BAC) is 27% of Li Lu’s portfolio and 9% of Warren Buffet’s portfolio (Buffet’s 2nd largest holding).

Buffet doesn’t own any random stock so he clearly still believes Bank of America is a quality stock. However, let’s take a look for ourselves and make our own conclusion.

See one-pager created by me below as a start.

Bank of America is down ~20% this year.

Positives

They currently trade at a P/E of just over 8, with an average (5 Yr) P/E of 12.2 (also below banking industry average) suggesting this could be a fairly valued stock.
Return on Equity has managed to maintain a pretty solid ROE ~10% over the last 5 years.
Revenues have grown from $88B in 2018 to $92.4B today (increase of ~10%).
Sustainable deposit growth.
Buffet loves to see outstanding share count going down. It’s a sign that shareholders aren’t get diluted, plus also evidence that Bank of America are allocating their capital wisely. Bank of America has consistently bought back their shares, reducing share count by 20% over the last 5 years. A big positive.

Negatives

Some of the deposits were invested in long-dated bonds which are down considerably.
Interest expense on deposits has increased (currently at 2.6% of total deposits). Though this is not too important currently as it’s solely due to the interest rate hikes we’ve seen throughout 2023.

Note: This isn’t a deep dive into Bank of America. This is simply a brief summary to get you going on your analysis of the company. Deep dives will come at a later date and will be part of the paid subscription.

Overall

Banks are very dependent on the economic environment. Over the next few months we will likely see rate cuts which tends to lead to some downward pressures on banks.

I predict we see some further downside ahead for the fundamentally strong Bank of America. If a further drop into the low $20s is seen, and no significant business risks come into play, I believe Bank of America would be a great deal.

1 Graphic

Just like you need to understand that stocks can keep going down more than you expect, you should also understand that stocks can keep going up more than you expect.

If you find yourself a winning stock, with strong fundamentals, then invest.

Don’t shy away just because you think "it’s already made it's big move.”

1 in-depth Twitter Thread

Let’s take a brief look at a thread I did on the legendary Bill Miller and his investing principles.

1 Quote

With an estimated 15%-30% chance of recession in 2024, here’s a little reminder from John Templeton.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy.”

1 Motivational Paragraph

Here’s 7 Money Lessons You Need to Know

To reach wealth you need to understand how money works and how the world works.

Let me share with you some important principles that you need to understand.

Investing an an index fund will not make you wealthy

Unless you’re making substantial income, investing into an index fund will not upgrade your life at all.

You’ll like retire with a million (if you start early enough), but this will be after slaving away at a job you dislike for 40 years. Is that wealth to you?

There’s a place for index funds. A big place. But don’t believe that investing in index funds will change your life in anyway aside from providing you with a good pot at 65 when you retire.

Working for a “high-status” company isn’t as good as you think

Ever see people brag about working for these huge companies like Apple, PwC, Microsoft, or Deloitte?

Me too (Hint: It was me a few years ago)…

You think you’re set up for life when you get a position at one of these great companies. But there’s a catch.

These companies can underpay grads because everyone wants to work there. People will accept lower salaries so they can get “Google” on their CV.

Moral of the story is this. If you’re job hunting, find a job that pays the most, offers the best training, and has the best work life balance. Don’t chase the name.

Skills are directly correlated to money

Here’s a famous quote from Dan Koe:

“Most people aren’t increasing their skill level, they are increasing the amount of time they spend at their current skill level.”

Money is created out of thin air

Governments won’t default.

Rates won’t remain high.

Central banks will print again.

Essentially, it’s why your income may go up but you’ll never get much richer.

The wealth game is to acquire assets. Any income from labour is destroyed by inflation each year.

Make money. Buy assets.

The gap between the rich and poor will widen

The rich hold assets. The poor penny-pinch.

Money in your bank account gets eaten away by inflation day by day. Those with no assets will fall further down the cliff as inflation pushes the cost of living higher.

Don’t be tight

“Save money”, “Don’t have coffee out”, “Don’t go out for lunch.”

The answer to your money problems is to make more money. There’s only so much cost cutting you can do.

Add new income streams

One income stream is the ultimate risk, especially if you’re providing for your family too.

Always try to add new income streams. Aim for 6-7.

That’s it for the day

I hope you enjoyed this article. As I develop on here, I’m sure there will be some changes to my structure and style, so please do leave some feedback.

About the author

Make Money, Make Time is written by Oliver, a qualified CA, and investor who has read over 300 investment books, and spend more than 50 hours per week researching stocks so that you don’t have to.

Make Money, Make Time