The power of '10 for 10'
I have no plans to ever manage anyone else's money again...
But if I did, I would make it a lot simpler on myself (and more profitable for my clients). Let me show you how...
After nearly 18 years of managing a number of hedge funds and mutual funds, mostly for a couple hundred high-net-worth individuals, I closed my funds in late 2017.
A year and a half later, I followed my longtime friend Porter Stansberry into the world of financial newsletters and have found my "happy place." The stress and headaches in my work have dropped by about 90%.
With my free daily e-mail, I now share my insights with more than 100,000 readers every day.
And with my team at our flagship Stansberry's Investment Advisory newsletter, we share our favorite stock ideas each month with our paying subscribers – at a low cost that puts investment advice in the hands of regular folks instead of just the wealthy elite.
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But if I were to return to managing other people's money today, I believe one strategy offers a good chance of beating the S&P 500 Index over a long period of time (10-plus years), which I'm capable of executing (for example, something like quant investing is outside of my circle of competence), is one that combines radical simplicity (some would say lethargy) and a very long-term time horizon.
What might that look like?
I might call it "10 for 10": Buying only 10 stocks and having an average holding period of 10 years.
(Before I go further, I know that everyone's personal financial situation is different... There's no one-size-fits-all approach. I'm simply discussing the power of this hypothetical "10 for 10" model.)
This strategy would also mean replacing no more than one stock a year on average. And it would involve very little rebalancing, as the key to long-term investment success (as I've written many times before) is letting your winners run.
Many studies and my own experience show that most of the gains in any portfolio come from a small number of big winners. So I would expect most of the gains of this hypothetical 10-stock portfolio to come from maybe two stocks – but you sap their power if you're continually taking cash out of those positions.
To see what this looks like, let's take a look at the 10 largest positions in my hedge fund at the end of 2012...
My funds had previously gone through a tough period... I had separated from my longtime business partner... and I had relaunched under a new name, Kase Capital Management.
I had sold most of my stocks in 2012, gone to almost 100% cash, and then carefully rebuilt my portfolio – focused on (mostly) high-quality businesses whose stocks I believed were undervalued.
Here's what those 10 stocks were back at the end of 2012 and how they have performed since then:
Keep in mind that these aren't current holdings. I eventually unwound my portfolio when I closed my funds to become a publisher.
But I still get a knot in my stomach looking at this...
If I had just gone on vacation for the past dozen years and never looked at my portfolio, I would have made nearly 10 times my money and crushed the market.
So what are the lessons here?
To repeat, your overall returns will be driven by only a few stocks, so you must let your winners run.
Had Netflix (NFLX) not been in this portfolio, the average return would have dropped by more than two-thirds to 248%, trailing the market. And removing Apple (AAPL) as well would have resulted in a mere 154% return.
Second, the more trading you do, the lower your returns will be. (Many studies across many years and millions of investors confirm this.)
Lastly, you never know where the big winners (and losers) will come from.
My four biggest positions were up 127% on average while my four smallest were up 373% and included my third- and fourth-best performers. The lesson here: diversify. Don't go crazy overweighting your favorite stocks – you need to temper your conviction with the humility to recognize that some of your second-tier ideas might be the best ones.
"But hold on just a second" you might be thinking... "While you might be able to do that in a personal account, nobody could manage money professionally that way."
Not so. Here are a few examples...
My friend Chris Stavrou, who ran a small hedge fund called Stavrou Partners for decades, bought A-class shares of Berkshire Hathaway (BRK-A) back when he was a stockbroker in the 1970s.
Chris started buying it for his clients at around $400 a share, even after it had risen more than 2,000% over the previous decade, because he didn't fall into the "I missed it" trap.
A decade later, he opened up his own hedge fund. By then, Berkshire was trading at an all-time high of $1,800 per share.
So did he say to himself, "Wow, this stock has moved up a lot – I think I'll wait for a pullback" or "Drat, I missed it"?
No. He saw that it was a great company run by a brilliant investor and the stock was still attractive at $1,800. So he bought it for his nascent fund...
And then he did something even more important than buying the right stock: He didn't sell!
Chris didn't sell when Berkshire shares soared past $5,000, $10,000, $25,000, $50,000, $100,000, $250,000, and even $500,000. (They closed Tuesday at $615,000.)
He didn't sell even when the stock grew to become more than 50% of his fund.
And he didn't sell when he closed his fund (he distributed to stock in kind to himself and his investors).
To this day, long into retirement, Chris still owns the BRK-A shares he bought a half-century ago.
And it wasn't just Berkshire – Chris still owns a handful of stocks he bought long ago like insurer Progressive (PGR) and Microsoft (MSFT) in which he has made more than 100 times his money.
Here's another example: Nicholas Sleep and Qais Zakaria ran a below-the-radar-screen London-based hedge fund, the Nomad Investment Partnership, from September 2001 through the end of 2013.
Early on, they identified three great stocks, Berkshire Hathaway, Costco Wholesale (COST), and Amazon (AMZN) – and that was basically it.
They compounded at 18.4% after fees – making their original investors more than 10 times their money, versus 6.5% compounded (equal to barely a double) for the MSCI World Index over the same period.
You can read all of their partnership letters here.
Or there's my friend Tom Russo of Gardner, Russo & Quinn, who manages more than $8 billion...
He graduated from Stanford with a JD/MBA in 1984, where he discovered Warren Buffett and value investing.
Soon thereafter, he started buying not only Berkshire but a handful of other blue-chip stocks like Brown Forman (BF-A), maker of Jack Daniel's whiskey and other spirits. 40 years later, he still owns them – you can see his entire portfolio here on WhaleWisdom.
Lastly, let's take a look at Buffett.
How would his stock portfolio have done over the past 10 years if he'd simply held equal-weight positions of his 10 largest holdings at that time? Here's the answer:
To my surprise, his portfolio – even adding in an estimated 2% annually for dividends –underperformed the S&P 500.
And note that, as with my old Kase Capital portfolio, the four largest positions, which rose an average of only 51%, underperformed the four smallest, which rose an average of 169% (excluding dividends). This again underscores the importance of diversification.
Interestingly, Berkshire's stock rose 221% – more than all but one of Buffett's largest holdings.
Why? In a word: Apple.
If we make one change to his portfolio, adding Apple around when Buffett started buying it in the first quarter of 2016, it changes the results significantly. It boosts the now-11-stock portfolio's average return to 219% – right near Berkshire's return.
So the lesson here isn't to never make a trade – adding the right stock can significantly improve long-term returns. But if I were managing money today, I would trade very infrequently.
The key, of course, to all of this is picking the right stocks. And here at Stansberry Research, that's what my team and I aim to help you do.
In the Investment Advisory, we give you our favorite, well-researched idea each month. And again, if you aren't already a subscriber, find out how to become one today for just $49 for the first year – and get immediate access to the full portfolio of existing recommendations – right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.