An Effective Capital Allocator - What's your opportunity cost?

Source: http://musingzebra.com/an-effective-capital-allocator/

In Warren Buffett’s 1965 partnership letter, he gave us a glimpse on how to think about capital allocation:

“The question always is, “How much do I put in number one (ranked by expectation of relative performance) and how much do I put in number eight?” This depends to a great degree on the wideness of the spread between the mathematical expectation of number one versus number eight. It also depends upon the probability that number one could turn in a really poor relative performance. Two securities could have equal mathematical expectations, but one might have .05 chance of performing fifteen percentage points or more worse than the Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the first case reduces the desirability of heavy concentration in it.”

Submitted July 26, 2018 at 05:14PM by dreamxite https://ift.tt/2Oh5W5Y