“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” ― Blaise Pascal, Pensées
According to Alice Schroeder’s biography, The Snowball, during one of the first meetings between Warren Buffett and Bill Gates, who as of 2016 have a combined net worth approximately $145B, there was a question proposed to the dinner table. The question was, “What would you say is the single largest contributing factor to your success?”
Without hesitation, Buffett’s response: focus. Then, Gates gave his response: focus. Isn’t that interesting. You have two of America’s greatest capitalists of the last century sitting around a dinner table, and they both attribute the same quality as the largest contributing factor to their success. Maybe they’re on to something we should know about?
For the passive investor, the typical recommendation on the street involves creating a some kind of well-balanced, diversified portfolio, which hedges against risk in every way possible. Sure the returns aren’t stellar, but they trickle in, and for the most part avoid significant losses. In other words, this is the “don’t place all your eggs in the same basket strategy.”
But for the more active investor, a diversified portfolio usually will not achieve the desired return for her time investment. Thus, highly knowledgeable and experienced managers, offer an inverse strategy. This is the “put all your eggs in the same basket, and watch the basket very closely strategy”. In Charlie Munger’s collected writings, Poor Charlie’s Almanack, Charlie notes:
Our investment style has been given a name – focus investing – which implies ten holdings, not one hundred or four hundred. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obvious idea. But 98% of the investment world does not think this way. It’s been good for us.
Focus, like compounding, is an extremely powerful tool, too frequently overlooked and undervalued. Gates likes to say that, “People typically overestimate what they can do in a year, and underestimate what they can do in ten.” That’s because, our brains have a hard time thinking that far in advance. Over an extended period of time, all that focus begins to synergize, similar to the way a magnifying glass intensifies the heat of the sun on a hot day.
David Rolfe is the Chief Investment Officer for Wedgewood Partners, with over 29 years experience in portfolio management. Wedgewood, is known for its “think like an owner” focused approach to investing.
In the interview, Rolfe talks about some of the requirements for executing a successful focused-investing strategy:
The key element of being a successful focused investor is figuring out what not to do, what not to waste your time on. And so that’s a key part of the culture of Wedgewood is what is it that we actually want to drill down on in terms of what’s in the portfolio and maybe what might be on our short, on-deck circle if you will.
From there, the conversation dives into some the specifics around Rolfe’s decision making process, and how he uses the focused mindset in his investment process. It seems that the value in adopting a focus-investing strategy is not about gaining some new insights as a manager, rather amplifying your existing strengths.
But that probably goes with any investment strategy, but all of the key precepts of a successful investor, every one of them is highlighted, every one of them is amplified if you’re a focused investor.
How Focus Investing Can Mitigate Risk
To make a great speech, is to tell the audience what you’re going to say, say it, then tell them what you said. Any deviation from this formula leaves room for confusion. Thus, in portfolio management, it’s extremely important to follow your own plan.
Take this lesson from the legendary value investor, and author of The Most Important Thing Illuminated, Howard Marks, of Oaktree Capital. In the world of dizzying options, in order to be successful, you’ve got to stick to the mission.
I think that the outstanding thing that we’ve done on the business side and that has persisted most strongly for the longest period is sticking to the mission. Back in 1978 when I started Citibank’s convertible bond fund, one of my bosses there said to me, “Well, why don’t you put in some common stocks?” I said, “Why would we do that? It’s a convertible bond fund.” He said, “Well, that way you can get higher returns.” I said, “Well, that sounds like a great idea. Then why don’t we put in some oil, some gold and some old master paintings, too?”
In this story from the early days of Mark’s investing career, the concept of focus, and value in sticking to the plan was obvious. If you tell a client you’re going to do one thing, why go through the trouble to lie?
Warren Buffett knows this lesson all too well. He likes to tell his managers, “Lose money for the firm, and I’ll be forgiving, but lose a single shred of reputation, and I’ll be ruthless.” In other words, defense against your integrity as a portfolio manager is essential, and sticking to your mission is one way to mitigate this risk. Here’s another quote from the conversation with Marks:
It happens to be a feature of the institutional world that if you try to do what you said you were going to do and mess up, that’s bad, but if you try something else and mess up, that’s many times worse, if you go outside your territory. Again, by saying what you’ll do and sticking to it, you’ve avoided one of the big problems, reasons for client dissatisfaction.
How do you apply the magic of focus in your investment strategy? Are you reading five newspapers per day? Are you building a small basket and watching it closely? Are you sticking to your mission? All of these are good questions to think about. It was the famous martial artist, Bruce Lee, who said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” Focus is much easier said than done, but when mastered, is a force to be reckoned.