Buying a Business You Understand - Isn't that what every manager does...no

This sounds pretty simple and maybe even a bit silly. That being said, if you own any mutual funds, take a look at their holdings. There will likely be 50-100 securities. Now, there will likely be multiple analysts at these firms who are reviewing these stocks. However, in the end there is typically one portfolio manager (PM). The PM is in charge of determining what goes into the portfolio and what doesn’t. In order to make a prudent decision that individual should understand the business behind each security. It is highly unlikely that individual understands the businesses of 50-100 companies. That is part of the reason why mutual funds lag the market.

We don’t believe in excessive diversification and hold 20-30 securities. We only purchase the securities of businesses that we understand. That means we need to understand the business itself, its industry and any specific upcoming events that may affect the stock (especially with special situations). All of this is a lot of work, even for one company. It would be impossible to expand this to 50 stocks. And it would be a bad idea. As a result you will never see a security in your portfolio that we don’t truly understand. It sounds simple, but this is incredibly important and something many other managers get very wrong.