9/10 is an exceptional mark in almost all applications. If a restaurant has a 9/10 on Yelp or Foursquare (yes, Foursquare is still an excellent restaurant rating app), it means the restaurant is elite. The same goes for report cards — if my daughter came home from school with all 90s on her report card, I’d be ecstatic.
It’s hard to just stumble into a 90 in high school — you have to work for it. For her, it would mean she spent her nights studying, completing homework and nearly mastering the material (as opposed to, say, bingeing Gilmore Girls… which, she would never 😉). Focusing on calculus instead of Netflix to the tune of an A-? I’d be so proud I would probably overlook the disaster zone she calls a bedroom (but don’t tell her I said so).
In most areas of life, showing up and consistently grinding out solid effort leads to good outcomes. Investing on the other hand? It just isn’t good enough.
In active management, there is no reward for learning 90% of what there is to know about a company or security. In fact, you’re probably better off knowing nothing about that specific investment than 90% — a passive index investment (which requires 0% company-specific knowledge) will likely produce results as good or better.
If you’re clocking 90% effort, you’re wasting your time and your money if you’re investing actively. The first 90% is just table stakes… it’s your ante for the game.
In active management, the last 10% is everything. It’s what Warren Buffett refers to as your “circle of competence.” The thinking goes that when investing actively, the key to picking winners is to find a few cases where you have a competitive advantage over the rest of the market — where you have some unique insight, knowledge or analysis your competitors don’t.
These unique insights are the source of outperformance.
The hard part is not the 90%. There’s too much money and too many brilliant people trying to outthink one another, all battling for that last 10%. That means if you believe you’ve found a winner — you do have a unique insight — you bet big. To bring back the poker analogy, if you’re only playing a few hands all night — waiting for the perfect cards — you have to make it count when you do get those pocket aces.
That’s why our strategies employ focused portfolios. You can only be good at so many things; you can only have market-beating insight into so many investment opportunities. But if you do those few things well, select the right bets, and bet big, a good investment outcome should follow.
If school were more like investing, my daughter could spend all her time focused on Math and Science — areas in which she’s more naturally proficient — and ignore English and History (where an A might be out of reach). She’d be better off getting a 100 in Calculus and an 80 in History if school were like investing… but it isn’t.
I’ll try to keep that in perspective as we await first-semester grades to arrive after the holiday break.
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.