Rules, everyone loves rules. I am sure that you have heard them. I am supposed to be writing my book but I am breaking my own rules and doing this instead. I can’t even follow my own rules sometimes and that’s a good thing because rules should always be broken if they cease to create value in comparison to a new method of value achievement.
Heck. I wrote this a week ago. Published it today on the 23rd. Break some rules.
Fast Foward in this video to 1:07. Watch Buffett on Diversification.
Now, there is a lot to be said about diversification and concentration of various allocations. Here is how I presently justify an allocation of 100% of my portfolio across 2 stocks.
1. My present personal EBITDA = Personal Annual Revenue – Rent – Car Costs – Food Costs – Childcare costs = $35,000. As such, since I run my life like a business I don’t mind leveraging up to 3.0x EBITDA. So I did just that. 6 figures of debt? Yes please.
2. Most of the time, people say don’t allocate more than 10% of your portfolio to any particular situation. Well, When I think about my portfolio of assets I think about my capitalized personal future income, which I estimate to be worth at least $600,000 from where I am sitting today. Yes, it is true that I believe in my future earning potential and I also believe that I should be trading at a fairly high multiple. As far as that goes, that means that I can allocate up to $60,000 into any particular opportunity. The interesting thing here is that people preach about diversification and yet they do not diversify their own personal income stream as a good 95% of it comes from their job. I am all for diversification, but everything must be taken into context. If you are to make decisions on any basis, you might as well apply your percentage allocation criteria across your true asset base, which absolutely requires that you capitalize your personal future income. If you are only able to save $5,000 a year for example and you have a $5,000 portfolio — I would argue that if you have a smart investment idea that takes into consideration the price of what you are buying in relation to your estimate of the intrinsic value of what you are buying that is a roll up of your estimated future discounted cash flows — then you should put the entire $5,000 into the one stock perhaps, depending on how much faith you put in your own personal ability to: a. grow your personal income. b. estimate intrinsic value. If you don’t know how to value companies on an EV/(Owner Earnings) Basis as well as generally understand how capital structures build up from senior secured debt to junior debt to preferred equity to common equities to warrants etc.
3. If you don’t know what you are doing, mutual funds promoters, etf promoters, index fund promotors, random financial advisors, etc. are going to lust after your blood money like mosquitos lust after an unaware victim’s blood while they sleep. They’ll take a percentage of your return to protect you from your own stupidity. This is the right thing to do if you have no idea what you are doing and are willing to admit it…
4. Even worse than not knowing what you are doing and being willing to admit it is truly not knowing what you are doing but believing that you know what you are doing. Only under these conditions will you overweight your bets into dead end scenerios. If you continue to think that a valueless opportunity has value, then you will continue to throw good money after bad. You will end up learning a very expensive lesson. This is a direct result of your own inability to estimate intrinsic value. You were wrong. It’s best if you man up and face the facts as to why you were wrong. Those that do not learn at this point in time proactively choose not to learn. Usually the lesson is obvious if you’ve made it this far. Anyway, I’ve gone down this route. I have invested into lots of dead ends. Anything chinese related. DJSP, EAR, AHR, etc. Lots of dead ends exist. Learn from your mistakes. Sell these early. But try not to sell if you truly believe in your cash flow analysis and that the portion of the capital structure that you own actually will receive that which you think it will.
One of the richest and most successful men that I have ever met successfully avoids #4 by aggressively cutting all dead ends/losses as short as possible and then taking that capital and reallocating it into other things. Brilliant man as his heavy weights are in things that he knows. He can always take advantage of situations as prices deteriorate this way because he understands the intrinsic value. If he doesn’t, he sells quick!
Anyway, perception is everything. If you are going to diversify appropriately I propose the initial question:
“What exactly are you diversifying across and what is the rate of earnings you own as a result of allocating your assets in this manner?”
Assets include time/money/health
If it doesn’t produce time and your ability to use it doing what you want then it’s better if you have less of it in your life. Sometimes there is a means to an end that is required but most of the time you can get around these sorts of things and just have your cake and eat it too so to speak.
Alright, now my mind is wandering. See ya.
Oh, before I go. Here is a chart that I want to put out there with the idea “Perspective is everything.” As I sit her i’d chalk my net assets at $10K and my monthly FCF at around $1K. Figures in USD. Soon to change. I used to have more zero’s. It’s time to get those zero’s back.
[11:42:05 PM] Nigel : I still dont get your overall plan
[11:42:31 PM] Glen Bradford: my plan?
[11:42:47 PM] Glen Bradford: right now i make $75K
[11:42:52 PM] Glen Bradford: and i own $50K of Y
[11:42:56 PM] Glen Bradford: and $50K of DEXO/SPMD
[11:43:02 PM] Glen Bradford: and i owe $100K
[11:43:12 PM] Glen Bradford: Y represents $50K of FCF
[11:43:18 PM] Glen Bradford: DEXO represents $150K of FCF
[11:43:26 PM] Glen Bradford: combined they represent $200K of passive income
[11:43:35 PM] Glen Bradford: remind you, i make $75K
[11:43:41 PM] Glen Bradford: so that is more than 2x what i make.
[11:44:15 PM] Glen Bradford: step 1 is validation.
[11:44:25 PM] Glen Bradford: i need validation in either my job or my ownership
[11:44:33 PM] Glen Bradford: validation in my job makes me $200K/year because i am worth north of that
[11:45:01 PM] Glen Bradford: validation in my ownership yields $200K/year of dividends as well as that value capitalized at least at an 8x multiple.
[11:46:44 PM] Nigel: validation that you are a value creator of more than 200K?
[11:46:55 PM] Glen Bradford: validation..
[11:47:22 PM] Glen Bradford: perception right now regarding the things i do and the things i own is a force that will pass
[11:47:38 PM] Glen Bradford: my ability to withstand time and to continue creating value is enormous
[11:48:03 PM] Glen Bradford: the stock market is in the business of discounting the future to today…
[11:48:13 PM] Glen Bradford: so right now, what i own is severly mispriced and hated.
[11:48:25 PM] Glen Bradford: soon, what i own will be less hated and less mispriced.
[11:48:49 PM] Glen Bradford: much like in my career, soon people will fight over me and perhaps want to pay me more than the value i create just to get my name association
[1/16/2013 11:51:02 PM] Nigel: good, that makes sense. Building that Bradford brand.
[1/16/2013 11:51:10 PM] Glen Bradford: yes
[1/16/2013 11:51:27 PM] Glen Bradford: but i dont care about the brand as much as icare about just not having to work
[1/16/2013 11:51:41 PM] Glen Bradford: my free time is my most precious asset that has ever been taken from me
[1/16/2013 11:52:56 PM] Nigel: yeah but no one can help you with the phrase, ” i care about not having to work”. I can’t think of a followup to that…
[1/16/2013 11:53:21 PM] Glen Bradford: it’s true. one of the few things that is worth caring about
[1/16/2013 11:53:24 PM] Glen Bradford: less obligations
[1/16/2013 11:53:45 PM] Nigel: What’s so precious about your free time? haha
[12:02:57 AM] Glen Bradford: if you were a future billionaire, what would you value most?
tldr; perception is everything.