When it comes to investing, there are no bonus points for originality. And while you don’t want to mindlessly ape another investor’s moves, it never hurts to see how your own portfolio stacks up against some of the best in the business.
Seth Klarman of Baupost Capital runs a multi-billion-dollar portfolio with just 40 stocks in it. The man’s like a demigod among value investors. Needless to say, he’s confident in his picks.
So, what is Mr. Klarman betting on?
Try energy. Lots of energy: a full 39% of his portfolio as of quarter-end, with nearly half of that in a single stock.
Now, Klarman isn’t betting on the price of oil rising or on “Big Oil” stocks in general. His bet is a targeted one on liquefied natural gas exportation. But it goes to show that, even in a full-blown crisis, there can be pockets of opportunity.
Next, let’s take a look at Dan Loeb, principal of hedge fund Third Point.
Loeb is not a passive investor. He’s a notorious activist investor known for taking large stakes in companies and then pushing for major change. You and I don’t have that kind of power, but we can still take a peek over his shoulder and see where he sees the most value.
Today, it’s in health care. About 40% of his portfolio is currently invested in health and biotech stocks.
I don’t have the stomach to invest 40% of my portfolio in the volatile biotech sector. And we’re also wary of the broader health care sector, as it suffered a significant blow in August and has yet to fully recover.
And finally, we get to Mohnish Pabrai, a well-respected value investor and the author of one of my favorite books on investing, The Dhandho Investor.
Pabrai runs the most concentrated portfolio I have ever seen among large managers. He has just seven stocks in his portfolio, and global auto stocks make up nearly 70% of the total.
Longer term, autos are a bad bet. Demographic trends suggest that, at least in the U.S. and Europe, auto sales are looking at a major reduction in demand. But any stock can be an interesting short-term opportunity if priced right, and Pabrai is currently showing a handsome profit on the trade.
For all we know, these superinvestors might dump these stocks tomorrow… if they haven’t already (we typically get the ownership data on a 45-day lag).
The takeaway is that it’s fine to bet big on a high-conviction trade if your system or research tells you to. But you should have an exit strategy, and you should be prepared to sell if your investing thesis fails to pan out.
Editor, Dent 401k Advisor
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