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"Buffett and Munger noted that at Berkshire, there is no checklist of prioritized asset classes or ideas. All investments are simply alternatives to each other. Buffett added that the “typical stuff [of asset allocation] is pure nonsense.” He criticized the practice of brokers and financial advisers recommending that investors hold a given mixture of stocks and bonds, saying “typical asset allocation is just merchandising — you don't need this.” Instead, he suggested, “The best way to reduce risk is to think.” The default position for investors should be short-term instruments, he said, and investors should move into longer term investments only when it's justified."</B.

Perfect start.

So, taking the B&H view, there are opportunities that are not available every day that provide superior returns. Having large positions in specific investments, holding them long term and recognizing that the market does not correctly price an investment all the time will offer the thinking investor a way to obtain superior returns.

B&H is well covered when it comes to listed securities. Less well covered but certainly no secret is B&H investments in re-insurance and long tail investments (statistically rare occurrences on a bell curve - the tail or the curve to the left and right).

If all asset classes are largely alternatives with only moderate differences for one class might be favored over the other then superior returns for similar risks must be the criteria. Knowledge of the investments is required if you are going to accurately assess the risks and the returns.

I am long real estate. When using moderate or conservative leverage you can easily achieve superior returns assuming 5% appreciation over long periods of time. Liquidity is not the same as a CD or other more 'liquid' investments.

You can lend money secured by real estate (acting as the banker if we need a label) where you would earn 10% paid monthly with a lower risk profile then a bank will normally take - 65% LTV. As individuals normally do not hold portfolios of such loans you have the risks associated with a specific event impacting a large part of the income stream. You also have possible increased returns from the foreclosure if there was a default as you would have an asset at a fire sale price.

Higher returns tends to found from lack of liquidity. B&H will many times buy into a preference share that was originated for their specific deal. It is not a commonly traded security and will not be something that they can dive out of with a phone call. If for no other reason then the position is large and well known so any movement out of the position will move the value being placed on the company.

I am more of a subscriber to the B&H view of asset allocation then the more common view. That said I do see the value to an investor in using asset allocation when the investor is mostly concerned about down side risks and prefers a passive investment of time and knowledge. Asset allocation can flatten out the returns so that you do not have any large holes while removing the peaks in a similar fashion.

A different Wall Street investor of years gone by said put all your eggs in one basket and then watch the basket. Be a specialist in something so you can see value when the less educated masses would not recognize the opportunities. Similar to Peter Lynch's point in his original book about focusing on a small number of stocks and to really study the company. Peter says to stay in equities and sell 5% a year if you are interested in income.

My liquid assets earn north of 10%. My illiquid assets can do much great (but they are illiquid). My best to date was just over !,000% after 22 months. The secret to the investment was luck in the market combined with leverage. This means that I was not expecting a market rise when I decided on the investment. It just happened. Was I was counting on was a 10 to 1 use of leverage with no carry costs and a reasonable sense of value so I could pick the right investment.

I will stop here as I have said enough to start a conversation about alternatives. BTW - Just because someone can does not mean they should. Hence part of the value in the discussion to help show the range that is possible so when someone chooses they are aware of what they ruling out rather then thinking the list of available options is narrow.

John B. Corey Jr.
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