Focused investing

There are as many different ways to invest as there are stars in the sky.

And, this is why most investors are dumb-founded when trying to pick investments–the choices are limitless.

One of the key problems is that most investment managers are not terribly honest about what they do. They say they do in-depth research, they say they don’t just invest in the market, they promise the moon and stars…

The reality is that the average mutual fund owns 172 stocks. That means their average position size is 0.6%. Even if a 0.6% position doubles, you won’t feel the benefit much.

Added to this, with 172 positions, how on earth does an investment manager do in-depth research on individual companies? Just keeping track of quarterly announcements would utterly over-whelm them. They can’t possibly follow 172 companies in-depth!

The average mutual fund charges their customers around 1% a year to manage money. But, with 172 holdings, it’s almost impossible for them to beat the market after fees. Why not just buy an index fund and get charged 0.2%?

The alternative is to invest with a manager who focuses on only a few investments, let’s say less than 25. Such investors at least have the possibility of beating the market, unlike someone who owns 172 stocks.

If you look at the records of managers who have strongly out-performed the market over the long term, you will almost certainly have found a focused investment manager.

There aren’t that many managers who focus on fewer than 25 investments. Why? Because most invest managers lack the courage of their conviction. As Warren Buffett put it, “wide diversification is only required when investors do not understand what they are doing.”

Added to this, being focused on only 25 investments frequently means higher short-term volatility and requires a lot of patience because short-term under-performance is inevitable.

But, the benefits can be huge. Focused investing can lead to out-performance that can have a huge impact on your long term wealth.

It may take time, it may take patience, it may take a stomach that can handle nerve-wracking ups and downs, but for some investors, it’s well worth the effort.

Besides, what would you rather do with your time? 1) spend several hours picking a manager who knows what they’re doing, or 2) spend the rest of your life diversifying, rebalancing your portfolio, and getting mediocre results anyway?

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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