Mr D asked me "Suppose you had 5 good picks. How would you allocate your money among them? I suppose today you do it randomly, or roughly equally"
I was stumped and had to admit I was doing it pretty randomly. So I asked him "How would you do it Mr D"?
He said, see if you like my method:
|
Undervalued |
Conviction |
Allocation |
|
|
High |
vs |
High |
Highest allocation |
|
High |
vs |
Medium |
Normal allocation |
|
Medium |
vs |
High |
Normal allocation |
|
Medium |
vs |
Medium |
Nibbling allocation |
And he added I refer to "Undervalued" here from a sheer/absolute undervaluation perspective - not relative to historicals, market or industry peers! Similarly "Conviction" is your conviction in the business - the level of homework/research and understanding of the business or company you have achieved, not whether everyone agrees!
This resonated with me immediately! It was a big jump up my learning curve, just having this framework with me - simple, elegant, easily transferable :)