2012 – the second calendar year of Squirrel, though still part of the first year of operations. Time to start the blog off in earnest. Hitherto, I’ve blogged about (some of) the technology behind Squirrel, primarily as a means to remind myself of what I did and why (http://beasquirrel.posterous.com/).

Now, we’re going to blog for our Squirrels. By serendipity, I chanced upon an article this morning in the Businessweek of Jan 9 2012 on the Sequoia Fund that dealt with a couple of aspects of portfolio management that we like to stress –

don’t over-diversify: you impact the materiality of your holdings


equity investing is for the long-term

One of our earliest Squirrels had given us his portfolio to analyze (as we do for most of our Squirrels). Apart from his other holdings, he had equity holdings in 45 scrips. Looks pretty diversified, no? Over diversified?

On closer inspection, 91% of his portfolio by value was held in only 16 scrips. Which is great. But it also means he had 29 scrips that contributed only 9% to his portfolio. 29 scrips that did nothing for him. Even if they all appreciated considerably (and that’s an unlikely occurrence), it would still barely register on his portfolio appreciation.

Let’s take a look at the aforementioned Sequoia Fund. It’s a fund started by two gentlemen, one of whom studied with Warren Buffet under the legendary Benjamin Graham at Columbia. When Buffet’s Berkshire Hathaway stopped accepting new investors, he recommended they invest with Sequoia instead. And Sequoia has delivered. Over the past 15 years the fund has out performed 97% of its peers.

Now the interesting part is that in 2003, Sequoia had 65% of its holding in just 6 companies. As of the last filing available (September 2011), it holds $3.19 billion in equity and still 65% of its holdings is in just 9 companies and 75% in just 12 companies. And the total number of companies? Just 35. $3.19 billion. That’s, in fact, 10 companies less than our Squirrel, who certainly doesn’t have anything close to $3.19 billion. So much for diversification.

And the other interesting bit is that (like Buffet), Sequoia’s managers “look for companies with competitive advantages and they hold the investments for long periods”. Read that last bit again: “hold the investments for long periods”.

A sequioa is a tree and we all know squirrels like trees. This confirms it.