The Warren Buffett Portfolio

 



When you have reached the millions in net worth, or when you hit the big 55, you will need to read this book eventually. When you used to scoff at 10% annual returns ( because you think you can do 100% in that forex market) , you may now find it a bit difficult to even get 6% ( after taxes and fees!) if you want to get a good night sleep on a safe portfolio.

His main focus is FOCUS INVESTING...

(1) Find that 10 good stocks
(2) Put 10% of your net worth into them
(3) Hold for at least 5 years

And how to find the 10 good stocks?
(1) Profit companies ( BUSINESS Tenet )
(2) Good management ( MANAGEMENT Tenet )
(3) Focus on ROE ( not just EPS) 
(4) Buy at a discount   ( MARKET Tenet)

And forget about the Modern portfolio Theory and Efficent market hyphothesis!

Use :
(1)  Multiple Models,
(2) reduce risk by finding all you need to know about that 10 companies,
(3)  forget diversifation, focus on 10
(4) the market is NOT efficient

More ideas in the page on Maths and Psychology:

(1) Prime vs Action bets
    Place small amount if you need action bets. But make sure you bet big enough when the odds are staked in your favour.

(2) The Kelly optimisation model
    2P-1=x whereby p=probability of the event happening and x=% of bet to make

(3) Sum of probabilities
      E(win) ( win amount + E(loss) ( loss amount)= the E ( positive/ negative outcome)

(4) Behavioural finance ( Thaler )
     (i) Overconfidence
    (ii) Over reaction
    (iii) Aversion for loss
     (iv) Mental Accounting

(5) PAMP
    (i) Proability of event happening
    (ii) Adjust P in event of new information
     (iii) Margin of safety
     (iv) Percentage of bets

(6) Probability from Card counting
     Assign +1 to small cards, and -1 to big cards. After the appearance of many small cards in succession ( the total goes to a big positive number), it is time to place a big bet on the blackjack hand. The banker has to take the cards at 16 and below, whilst staying at 17. So he needs to get either 1,2,3,4 to stay in the game.... whilst others5,6,7,8,10, jack, queen, king is more likely to appear after a series of small cards ( the sum gets bigger).

Higher level of card counting systems assigns neutral figures to 7,8,9...
"... For instance, the Hi-Lo system subtracts one for each dealt ten, Jack, Queen, King or Ace, and adds one for any value 2-6. Values 7-9 are assigned a value of zero and therefore do not affect the count..."

 http://en.wikipedia.org/wiki/Card_counting