Letting winners run outperforms constant trimming
Individual investors can achieve significant outperformance over active managers by letting winning stock positions run indefinitely rather than systematically trimming them.
The argument
Chris Davis argued that his mother's portfolio outperformed his fund by 500 basis points annually over 20 years because she never sold her shares of compounding giants like Amazon and Google. While institutional managers are bound by regulatory diversification limits (such as the Investment Company Act of 1940) and client risk tolerances, individuals can exploit the power of uninterrupted compounding.
The thesis, stress-tested
✓ What validates it
- ✓Concentrated positions continue to compound earnings growth
- ✓Individual portfolio outperforming diversified benchmarks over multi-year horizons
▸ Risks discussed
- ▸High idiosyncratic volatility from extreme portfolio concentration
- ▸Potential to hold failing companies instead of compounders
Hear it yourself
"Her portfolio has probably outperformed our fund by 500 basis points a year for almost twenty years. And you say, how's that possible? She doesn't own a single company that we don't own. We don't think this is quite the nineteen seventies. Rather, it looks to us much more like the nineteen sixties. And the nineteen sixties were a period this the second half of the nineteen sixties were called the guns and butter period. One of the peculiarities of investing is that the more risk people feel they're taking, the less risk they are taking. If you can't afford to buy"
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