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Q & J: Focus Or Diversify?

August 22, 2015

Q: Dear Mr. Felder,

While I really like your general tilt on things, the latest quote you use from Stan Druckenmiller seems a bit hyperbolic. He may be 100% correct about gold and his record is unassailable but it is not true that “Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets.” Berkshire according to Wikipedia holds approx. 57 different companies (from catsup, to railroads, to insurance, to Dilly bars) and they own many of them outright. I think you would agree that holding 57 different companies whether in stock, complete ownership, or whatever, would constitute a diverse portfolio (given that the holding are so diverse) and be far from a concentrated philosophy.

I have read other books that talk about holding fewer more well researched stocks but it seems to me that with all of the research in the world, luck plays a much larger part in a portfolio’s returns than many would admit to and that a diverse portfolio is a far more reliable way of operating than putting all of your money on red.
Do you have any thoughts on this?

Thank you.

J: I think it’s really important to distinguish between today’s Warren/BRK and the early Warren/BRK that is really responsible for where he is today. Today, I would argue Berkshire is looking more and more like an index fund – Buffett has said as much. But this is nothing at all like the Warren Buffett investing philosophy that got him where he is. The early Buffett partnerships, where he really laid the foundation for his personal success, were defined by a highly focused investing style very similar to what Druck talks about. This is also why his returns during this period were very similar to Druck’s (>30%). In fact, without a highly-focused investing philosophy there would be no Berkshire as he would never have taken such a large position in that company in the first place.

Q: Hey Jesse,

I’m new to investing and I really appreciate your work and love your updates. I’ve recently been reading a lot of Ray Dalio’s work in combination with research about Japanese debt. Tres Knippa lays out a nice case for shorting bonds and yen.

Just a couple questions with that.
1) Can you think of any opposing arguments? I haven’t had much success in being a devils advocate.
2) Is this strategy something you would consider?
3) If so, what avenue would you use? Buying gold or a house with Yen is rather complicated in the US.

http://www.shortjapandebt.com/

J: I think the bigger picture is that Europe and the US are also involved in a very similar process. Hard to know who will try to outdo whom at any given time during this longer-term game of currency devaluation. The Japanese have led so far but the Eurozone is trying to play catch up and the US may rejoin the game at some point. The simplest conclusion I come to is to own gold. And the fact that gold is so hated right now makes it all the more appealing to me.

Q: Hi Jesse,

Any thoughts on this ?

http://www.thestreet.com/story/13262222/1/new-gold-ngd-stock-gains-amid-surge-in-gold-prices.html?puc=yahoo&cm_ven=YAHOO

J: Only that I LOVE it when the consensus says “SELL.”

Q: Hi Jesse,
Good Morning and Thank you for your market prospective. Enjoy reading your reports
I have a quick question on GG and NGD.

These two stocks have come off 20% from their recent lows. And also broader market is going through some correction.

How do you see GG and NGD going forward in next few months? Are they still good bets to continue to hold or good time to sell them now. Considering Gold called from $1080 to $1160.

Appreciate your prospective.

Thank you.

J: I don’t know about the next few months but I think there’s a very good chance that over the next year or two they will be much, much higher than where they trade currently.

Q: Hi Jesse,

Would you address bear market strategies? Specifically, what inverse ETFs do you like and how would you handle stop-loss and/or stop-limit orders.

Also, if this turns out to be a long rocky road to the bottom, what will you be looking for to identify temporary bottoms that will see some substantial upside?

Thanks.

J: That’s very hard to say. I have my own strategies that I write about every weekend. I think it’s important, however, for each investor to employ something that suits their own individual skill set and goals. For me, I’ve been long SQQQ, SRTY and FAZ. I will trade around those positions until I think we see a major bear market low.

Q: Gold has had a nice “dead cat” bounce from bottom. Hopefully it is more than that and turns into a longer term trend.
But what about energy and the smaller cap energy stocks? Is oil ready for a bounce?

J: It could be. I know this doesn’t help much but I just don’t get the feeling we have seen enough pain there yet.

Q: NLY… has a 3000% dividend ratio…how can that be safe? Can you point me to a discussion of it?

Thanks.

J: Read through a few of their earnings reports or annual reports. The company’s GAAP net income fluctuates greatly from quarter to quarter mainly due to the change in the value of the company’s investment holdings. The company also reports “core earnings” which are better used in determining the sustainability of the dividend.

Q: Good morning Jesse,

I signed up for TFR Premium a couple weeks ago and have been enjoying the comprehensive weekly reports and charts, thank you for your work.

In the wishy washy world of sentiment, what are the surveys/indicators/charts that you find most helpful?

Thanks.

J: That’s a tough one. The longer-term the better, in my view. Here are a few I shared last week on Twitter:

Q: Another article re-slicing and confirming your equities return thesis.

http://www.thestreet.com/story/13257758/1/here-are-the-ominous-signs-a-crushing-stock-market-correction-looms.html?puc=yahoo&cm_ven=YAHOO

J: Thanks. I’ll take a look.

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