There are some good quotes from Mark Mobius in his interview in the Super Analysts book as follows.
Well, diversification really saved us, because it saved us from many of our mistakes. In this business, you are going to make mistakes, no matter how lucky or how smart you may be… For example, for the entrepreneur, the self-made man who is concentrated on one business, the idea of putting your eggs in one basket and watching that basket very carefully is very, very good, and many people have made a lot of money doing that. But that’s not appropriate when you’re managing public funds, because the volatility and risk are too great…. you have to have diversification, but then you try to concentrate as much as possible by knowing each element in your portfolio and watching it very, very closely. So it is possible to have the best of both worlds — that is, to have the very best companies that you can find, but in a diversified portfolio. So, when something happens through no fault of your own — by the way, there are many things that can happen over which you have no control — you have some degree of protection.
His quote on diversification is a good warning that no matter how smart you are, you will make mistakes, and you need diversification to save you so that you can stay in the game in the long run.
On Market Timing and Holding Cash
We’ve demonstrated that in our funds as well, and being fully invested most of the time is what we find works over the long term. Perhaps the lowest we have ever been is 80%. And we are probably never going to go there again because, as you say, being fully invested is very, very important.
There are differing views from other famous investors on this one. Some many, the cash holdings depend on how many good investment opportunities are found. If you find only 3, and you’ve allocated say 20% each, you would have 40% left in cash. Others have the view that it is best to be pretty fully invested as the market overall goes up, so if you have only 3 good investments, more weight should be given to them so that you have less cash available, and only reduce their weights when you find the 4th investment. You can’t say for sure which method is the ‘best’ method without considering the particular market situation at any point in time.
… the end of the day, you want to know about earnings, because that’s what investing is all about… Now what we do is say, okay, let’s not look at earnings this year. Let’s look at it in five years, because at the end of the day, that’s when it’s critical. So, the price we pay for earnings five years out is what interests us.
Again there are differing views on this one, where there are some that advocate not using DCF at all, and at most using it as a confirmatory method and estimating cash flows not more than 3 years. I would say that it always depends on the business, the more consistent and predictable the earnings, the longer you can project in the DCF.