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Oct 30 2009

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Contemplating Concentration

A friend and I have emailed each other for the past three years about our thoughts on investing in stocks. Occasionally we find ourselves writing fruitfully on a tangential subject. The following is a selection from an email I wrote on 10/25/2008 in the midst of the horrendous crash in the stock market.


I’ve said it before and I’ll say it again. If I ever get the time I’m going to go through all of these emails and edit together some kind of short book (100 pages?) summarizing our thoughts, wisdom (LOL!) and ideals, and what we did in reality. One thing I will find in sorting through these emails is that we (probably I more so than you) are constantly distracting ourselves with glances at a zillion other stocks and others’ ideas. For example, the subject of this email is “BLG.” Looking back at this stock made me think about Templeton and the shotgun. There are two problems with this. I don’t fundamentally believe in shotguns. I believe in bazookas. Or, to use a more constructive metaphor, I believe in trying to change the world by gathering together 12 dedicated and loyal disciples into a core group to serve the goals of the growth of the greater good than trying to gather together 500 into the core group. Think about it. You’re a Christian so I don’t have to convince you that God exists and that Jesus is God incarnate, and so on. Is it more than coincidental that God in Jesus chose a concentrated approach to spreading his kingdom? And Buffett, the most successful investor in history, chose a concentrated approach to growing wealth?

I don’t want to get too carried away with this analogy, but perhaps there is something fundamental in the way the universe is structured, or at least in the way that humans work, that optimizes growth from a concentrated core? The early church developed many “gospels.” There are several non-canonical gospels I can think of (15? 20?) like the gospels of “Thomas,” “Philip,” “James,” “Mary [Magdelene].” and so on. But the church ultimately said, “No thanks, we need four and only four.” There is enough depth and diversity in those four gospels that scholars have spent their entire lives plumbing the depths of their wisdom and reflections on human society and their diverse portraits of Jesus. Scholars have poured forth untold billions of words about these four gospels. Ditto for the Five Books of Moses for Jews, the first five books of the Bible. Ditto for the Ten Commandments. When I really think about it now I see concentration is often at the core of what holds humans together and at the core of what preserves us and keeps us growing into the future. The same is also true of evolutionary biology. Consider chromosomes. Humans have two copies of 22 chromosomes and 2 sex chromosomes for a total of 46. That’s 23 pairs of chromosomes to organize 20,000 to 25,000 genes in the human genome. Why 23? Why not 500? Why not 180? I don’t know. I’m sure scientists have theories about why it “has to be” this way for DNA transcription to function. To me, it’s a mystery. Why did Vitaliy Katsenelson say in Active Value Investing that the consensus among expert portfolio theorists is that the ideal number of stocks in a portfolio is 18 to 25 to optimally balance single company risk and maximize gains? I don’t know. It’s a mystery, but I suspect there is something fundamental in the mathematics of all of these examples that makes concentration “ideal.”

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