Tom Gayner On Position Sizing And Strategy

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In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Tom Gayner on position sizing and strategy. Here’s an excerpt from the episode:

Jake Taylor:
I’ll go first. I’m going to be talking today about this video that circulated on Twitter where Tom Gayner was discussing different position sizing and strategy around how much should you own to kind of force yourself to do different amounts of research.

Jake Taylor:
So, the bigger story of that is that Tom was talking about how he views it, one, like a … Well, I’ll start first with he’s talking about if he’s watching a college football game with a friend and he doesn’t know either of the teams. He’ll place a friendly wager something small just to have a little bit of skin in the game.

Jake Taylor:
And he applies that same idea to investing where he views different investments as there’s the majors, there’s minor league teams, there’s even lower Single A and depending on how much he feels like he knows about the company, the more he gets to know it, the more I can escalate from the Single A to Double A to Triple A, all the way up to majors for your biggest position holdings.

Jake Taylor:
So I found it to be an interesting framework to tackle the idea of what do we do with position sizing.

Tobias Carlisle:
Right. It kicked off the discussion right. Like he’s saying and I think his argument is a good one. And it’s one that we’ve discussed previously on this podcast a few times and it’s one that I subscribed to too, that until you buy something, you don’t follow it closely enough to really form an opinion on it.

Tobias Carlisle:
And so a few people objected to that in the comments and they said, “You don’t need to do that. You can just have a tracking portfolio, a paper portfolio that just follows those positions.” I think what that misses though is that, I mean, unless you’re including the price at which you discovered something.

Tobias Carlisle:
That’s kind of the thing that I find sometimes in my PA and more discretionary holdings in the past. I don’t have any now. But you might see that something has gone up or down a lot, and that might be the thing that piques your interest.

Jake Taylor:
Yeah, the other analogy he made was that it’s like a library card where you’re checking out a little bit of the company, not paying much for it but it forces you to read it because you brought the book home.

Tobias Carlisle:
Yeah, I like that analogy.

Bill Brewster:
Yeah, that was good. So the guy who find the value that commented, I mean, I know him IRL and he’s a really impressive dude. And like he is the type of guy that I don’t think minds watching 200 companies in an Excel sheet and waiting to take bets.

Bill Brewster:
But that is aligned with his personality. And I think that what Tom has found and what I think you need to really think about when you’re trying to adopt somebody else’s strategy is like Tom’s goal is to make Markel a long-term compounding machine.

Bill Brewster:
So whatever drag that Tom gets from like a 5% position from library cards doesn’t matter in the real accomplishment of his goal. And if you look at his actual concentrated holdings, they don’t really change that much. So as a Markel shareholder, is it more important that Tom runs like a theoretically sound fund strategy or is it more important that Tom executes what he needs to execute in order to make you wealthy.

Bill Brewster:
And I just think that it’s a different conversation and you need to … Whatever your game is, just like play that game for you and that, I think, takes a long time to figure out what your game is.

Jake Taylor:
I agree. I think … What do you guys think about this as a possible interesting way of approaching it? What if you could kind of gamify a little bit for yourself where after a certain, let’s say, a certain number of 10Ks that you read will unlock a percentage that you could bet on it. Or maybe if you were tracking your time, it could show you that you’ve spent enough time to be comfortable to unlock a bigger percentage of equity that you could invest into an idea. What do you think about trying to game yourself a little bit?

Tobias Carlisle:
I like that idea and it’s something that we discussed when Bill was trying to work out how much he should buy. I was like, that should be like, if you find something and you’ve done a little bit of work, you read enough of it. You should be able to buy a little bit just to keep on digging into it. Maybe not a full position until you’ve completed your entire checklist.

Tobias Carlisle:
But I think that makes some behavioral sense.

Bill Brewster:
Yeah, and I think too. Like I think what Bruce Green … Well, what he has said in the past is have any index fund or whatever your preferred … Like say I want deep value exposure. Okay, fine. There’s an ETF that does that. Have something there. Now, I’ve got my exposure and I don’t have to have the race to put money out.

Bill Brewster:
I mean, I think that for me, the hardest thing was now my portfolio is somewhere that I don’t need the next idea to enter in. So I don’t really have that much of a pressure cooker to find something. So I’m more comfortable with like a watchlist.

Bill Brewster:
But in the beginning, I think cash drag is real. I know that cash doesn’t matter until it does. But to get some exposure, I think having some sort of base strategy and then some tracking stocks is not the end of the world. And I just think what Tom does is immaterial relative to the overall accomplishment of his goal. I don’t think that those tracking stocks create a significant drag.

Tobias Carlisle:
Somebody has pointed out in the comments that however you’re doing it, it’s probably fine as long as it works for you. But I think it is helpful to hear how other people do it. And that’s one thing that I have found personally when I’m a little bit more discretionary is to earn a little bit because I don’t really pay enough attention to it until I do.

Tobias Carlisle:
And then if it moves around a little bit, that’s kind of my trigger to dig in a little bit more.

Bill Brewster:
Yeah, well. I’m sorry, researching, and I know I’m sorry that people have to hear about it again, but researching [inaudible 00:08:23] is like so much different than owning a little piece. And once you actually see the financial engineering piece and lived through some of the asset sales, like it’s just so different.

Bill Brewster:
So if you need that tracking position to feel that, I think that’s important.

Jake Taylor:
I agree. I think it’s smart actually. And there’s optimal that maybe you’re giving up some tiny little percentage by having those. But if it means that you have a better shot at catching like those one or two that probably can make an entire career, then it becomes completely immaterial.

Jake Taylor:
And your odds are even if it seems like kind of a local maximum to be efficient without having any of those frictional points in there, you’re probably blind to a bigger maximum by not having it potentially.

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