Benello Allen C. - Concentrated Investing

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Copyright 2016 by Allen C. Benello, Michael van Biema, Tobias E. Carlisle. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Benello, Allen C., author. | Biema, Michael van. | Carlisle, Tobias E., 1979- author.
Title: Concentrated investing : strategies of the world's greatest concentrated value investors / Allen C. Benello, Michael van Biema, Tobias E. Carlisle.
Description: Hoboken : Wiley, 2016. | Includes index.
Identifiers: LCCN 2016002290|
ISBN 9781119012023 (hardback) | ISBN 9781119012054 (ePDF) |
ISBN 9781119012047 (ePub)
Subjects: LCSH: Capitalists and financiers--Biography. | Investments. | Portfolio management.
Classification: LCC HG172.A2 .B454 2016 | DDC 332.6dc23 LC record available at http://lccn.loc.gov/2016002290

To my wife Julie, and to my daughters Sophie and Avery.

Allen Carp Benello

To Lavinia, Fiamma, and Tristanmy earth, my flame, and my hunter.

Michael van Biema

For Nick, Stell, and Tom.

Tobias E. Carlisle

Michael and I came up with the idea for this book while riding in a taxi on the way to a meeting with an investment manager. Michael interviews managers of value oriented funds regularly for his fund of funds business, and has met with at least a few hundred during the course of his career. On this particular occasion Michael asked me to come along to help evaluate a new manager, and I agreed to join him in between meetings of my own. As unlikely a place as it was to hatch the inspiration for this project, we were both puzzled by a strange paradox that we had observed over many years in the investment business: The returns generated by investors do not always correlate to their ability to analyze and understand companies.

With the initial idea for a book, and a set of interviews, Michael and I reached out to Bill Falloon at Wiley for help. Bill introduced Michael and me to Tobias Carlisle, the author of two other successful investment books, Quantitative Value and Deep Value. We found that they shared a very similar set of ideas about investing in general and about the theme for the book, concentrated investing, in particular. We hit it off immediately. Tobias agreed to come on board as a coauthor along with Michael and me. He has been instrumental in helping to take the raw interviews and put the investors and their flagship investments into their proper historical and theoretical context. He also helped to examine the strategy quantitatively to determine the drivers of outperformance: Was it a matter of selecting the right securities, or holding them in the right amounts?

I recall one individual, whom well call Investor Number One, whose returns were decent, but who seemed to be totally off-base when it came to the highly subjective and trickier job of figuring out whether a companys business and management were fundamentally attractive, or worth skipping over. He had made some notable blunders, on one occasion pounding the table to his colleagues about a soft goods company that was soon destined for bankruptcy. To me and a few others with whom I spoke at the time, it wasnt difficult to comprehend that this company was not attractive and perhaps even precariously situated, so it left me scratching my head when I read his funds performance results, which seemed to have a way of levitating away from what must have been some costly errors.

On the other hand, another acquaintance whom we will call Investor Number Two was deeply insightful when discussing an industry or company and always grasped the investment case, for or against, with enviable precision and knowledge of the relevant facts. This second persons returns, however, were decidedly lackluster. He somehow never managed to fully capitalize on his insights, which were tremendously valuable and, one would have thought, should have led to very outstanding returns.

This paradox got us thinking about the topics of security analysis and portfolio construction, and how they relate to returns. Apparently, analytical ability alone does not constitute a really good investor. Investor Number Two in the preceding example should have been doing better with his ideas, and just imagine what Investor Number One could have accomplished if he had been more analytically competent.

A lightbulb turned on when I realized the investors I admire the most (and this admiration comes only in part from the amazing success theyve achieved) tend to share one characteristic: They are concentrated value investors. That is, they adhere to a concentrated approach to portfolio construction, holding a small number of securities as opposed to a broadly diversified portfolio. We set out to study the mathematical and statistical research that has been done by various academics on the subject of portfolio concentration, and to chronicle the methods and achievements of some of the people who have benefited from being concentrated value investors. Our first task was to approach Lou Simpson and Kristian Siem, two ultra-successful concentrated value investors who had never previously agreed to interviews on the mechanics of their investment style. As we completed their interviews, we began to compile material on the subject of portfolio concentration, a trail that ultimately reached back beyond the Kelly Formula to John Maynard Keynes.