Morningstar named Bruce Berkowitz the mutual fund manager of the decade in 2010. Since his fund was founded in 1999, he has averaged 10% annualized gains versus only 5% for the S&P 500.

Yet he could have done significantly better with the tools of TradeStops and I think you’ll agree that there’s a powerful lesson for individual investors once you see how.

Berkowitz is one of the billionaires we’ve been tracking and studying recently as part of our TradeStops Billionaires Club. Berkowitz makes a particularly interesting study because he tends to make highly concentrated bets and doesn’t shy away from volatility.

I’m an advocate of individual investors having more concentration in their portfolios than most seem to prefer, but Berkowitz takes things to an extreme. Here’s his current portfolio as of June 30, 2017:

Beating Bruce Berkowitz

Berkowitz only has 9 stocks in his portfolio. His largest holding, JOE, is half of his total portfolio! Moreover, several of the stocks in his portfolio are all related to another single investment idea – the Sears family of businesses run by Eddie Lampert. SHLD, SRG, SHLDW, SRSCQ and SHOS are all part of the Sears empire. And LE was spun off from Sears in 2014.

If you lump these six Sears investments together they collectively represent 48% of the investments in Berkowitz’s portfolio. So Berkowitz has 98% of his portfolio invested in just two companies!

That is extreme concentration by any measure.

Berkowitz has never been one to shy away from volatility. Looking at the table of investments above, we can see that one of his biggest holdings, SHLD, has a current Volatility Quotient (VQ) of over 50%. That’s crazy volatility.

That penchant for volatility is reflected in the total volatility of his overall portfolio – his Portfolio VQ or PVQ. Take a look:

Beating Bruce Berkowitz

18.7% is a very high PVQ. That’s 80% higher than the current VQ of 10.4% for the S&P 500.

The first stop for Mr. Berkowitz, should he choose to subscribe to TradeStops, should most definitely be the TradeStops Risk Rebalancer. The Risk Rebalancer is a tool in the Premium and Lifetime versions of TradeStops that takes all of the capital and equities from a given portfolio and reallocates the capital so that each equity investment has equal risk. (Risk is defined as VQ% for each investment.)

Just by using this one simple step, Mr. Berkowitz could dramatically lower his overall PVQ from 18.66% down to 15.28%. Here’s how much of his portfolio he would have in each of his investments after rebalancing:

Beating Bruce Berkowitz

Most strikingly, you can see that what was previously one of Berkowitz’s smallest investments, Leucadia National (LUK), would have been one of his largest investments had he taken equal VQ risk on each of his investments. That’s because LUK was actually his lowest VQ position.

How would Berkowitz have done had he just used this one simple tool of TradeStops to better balance the risk in his portfolio? Take a look:

Beating Bruce Berkowitz

The only difference between the black and blue lines in the chart above is how much money was put into each investment. The stocks are exactly the same. The entry dates are exactly the same. The exit dates are exactly the same.

By simply taking equal risk on each of his investment ideas, Berkowitz could have improved his considerable gains from 166% over 17 years to 520%!

Looking at the chart above, you’re probably wondering what accounts for the dramatic outperformance of the blue line over the black line in the past 12 months.

The answer is pretty simple – more money in winners and less money in losers. Before rebalancing, SHLD was 23.8% of the portfolio and LUK was 0.2% of the portfolio. After rebalancing, SHLD was 6.5% of the portfolio and LUK was 18.6% of the portfolio.

Here’s how SHLD and LUK have performed over the past 12 months…

Beating Bruce Berkowitz

It’s important to note that SHLD was one of Berkowitz’s most volatile holdings with a VQ of 50.6% while LUK was Berkowitz least volatile investment with a VQ of 18.8%.

And therein lies a lesson for us all.

I have found, and repeated tests have confirmed, that our biggest gains come from putting more money into our less volatile investments… and putting less money into our more volatile investments.

I’ve also found that our biggest gains often come from the places that we least expect.

You know what they say about the best laid plans of mice and men,


Richard Smith, PhD
CEO & Founder, TradeStops