Remember picking teams in gym class? It was a brutal ritual with a predictable mix of embarrassment and hurt feelings that we rightfully left in the past. We generally try to avoid ranking human beings (especially children). Ask a parent and they will swear they love all their children equally. But if we’re being completely honest, most parents would admit to internally ranking their children during the more challenging moments of child-rearing.
With three daughters at home, I can admit that the internal rankings are highly volatile. The “favorite” child changes with the circumstances and the phase of life. The child who starts sleeping through the night moved quickly to the top of the list; the child who had just turned the kitchen into a science experiment fell in the standings. But even at their worst, you would never pick just your favorite child to take on vacation while leaving the rest behind. Ultimately, ranking your children leads to mostly bad outcomes.
Ranking your stocks, however, is an essential part of pursuing better outcomes.
This quarter marks the five-year anniversary of our domestic strategy at City Different Investments. Looking back over this period, the most important lesson has been the value of ranking our portfolio investments.
Over the last five years, our highest-conviction ideas added the most value. In hindsight, we likely would have been better served in many cases by giving our strongest ideas more room to compound, rather than redistributing capital to our next-best idea. If there’s one primary goal I have for the next five years, it’s to spend more time thinking deeply about our absolute favorite investments. Capital is finite. Attention is finite. The core job of an active portfolio manager is to decide, among a large number of potentially attractive opportunities, which few deserve the most of both.
Of course, this approach comes with caveats. Concentration has real trade-offs as larger positions increase the chance that our results will differ meaningfully from a benchmark, and a holding that becomes too large can make it harder to evaluate new evidence objectively. So, while we want to lean into our best ideas, we still need to maintain an appropriate balance within the portfolio.
Reaching this milestone has also made me reflect on the team around me. Another major goal for the next five years is to actively learn from the distinct strengths of my colleagues on the equity team:
The best lessons from the first five years aren’t that complicated:
None of these principles guarantee a good quarter or even a good year. But over a long period, we believe they improve the odds of making thoughtful decisions with your capital. That’s the work we intend to keep doing over the next five years.
IMPORTANT DISCLOSURES
This post is for informational purposes only and should not be viewed as a recommendation to buy or sell any security or personalized investment advice. The views and opinions expressed by individuals are their own and not the views or opinions of their employer. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.