The Motley Fool Discussion Boards

Previous Page

Stocks B / Berkshire Hathaway

URL:  http://boards.fool.com/interesting-comparison-between-berkshires-19219719.aspx

Subject:  Re: The Lesson Date:  6/21/2003  2:30 AM
Author:  hartmanbirge Number:  78804 of 213054

Interesting comparison between Berkshire's portfolio and one's own portfolio. Awhile back I thought about this (not quite to the degree laid out by you) and thought that if one was somehow able to purchase ONE great business per year, hang on to what I purchased earlier and let them compound, that it would look something like this:

Year.....# purchased.....portfolio % of new purchase......total # owned
1..........1..............100...............................1
2..........1..............40................................2
3..........1..............25................................3
4..........1..............15................................4
5..........1.............. 7................................5

Sorry about the annoying dots but the Fool's word processor always compresses them when you post - in any case my point is that as time goes by each new purchase has declining impact on the overall portfolio unless one sells one of the earlier ones. Of course this model becomes bunk if one suddenly sees a nice rise in incoming investment cash - significant enough where the amount would bump up the portfolio % of the new purchase. Assuming that most of us do not see such a windfall and the inflow remains fairly constant then I think the above is exactly what would happen. Berkshire has mitigated this to a degree because it gets its investment cash primarily from rapidly increasing float - not a luxury available to us. So to say that the two are comparable I think is somewhat true but the entire model is different. For most of us, our investment cash does not anywhere come close to approaching the rise in Berkshire's growth in float. The above example would certainly change the dynamics of the entire portfolio over time....but absent a major sale each decision declines in significance (and as time goes by each decision should be better with acquired knowledge and experience), the total number of securities owned increases....so we begin to see diminishing returns, greater diversification, and a declining critical mass for our great ideas. On the other hand, if one uses a very concentrated portfolio and the opportunity arises one could ADD to the previous idea (ala Buffett's second foray into Coke) and add to the critical mass...maintain the concentration in our best ideas and keep the concentrated dynamic.

HB

Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us