Exceptional
Stock markets had another up week following their best week of the year. The S&P 500 rose 1.3% and the Nasdaq climbed 2.4%.
In a rare interview that was published during the week, investor Reece Duca discussed the importance of finding exceptional companies if one is going to be a concentrated investor:
“There's only a tiny number of exceptional companies. And you understand that there's some very specific things that permit exceptional companies to be sustainable decade after decade after decade. And many, many of them have to do with getting to the point where your customers are fanatically reliant, whether it's a consumer product or whether it's a business product, but your customers are fanatically reliant on what you deliver to them. If it's a consumer product, it's somebody is hooked on Coke, and they're gonna drink coke come hell or high water. If it's a business product, it gets locked into the workflow of the business, it's something that your customers are ecstatic about. And that just essentially codified to us that what we needed to do, if we were going to have concentrated positions, we basically had to have super, super high confidence. And you had to find exceptional companies.”
Exceptional companies can fend off competition. They’re able to grow and reinvest capital at high rates of return. And while there are limits to the price one can pay for even an exceptional company to earn a decent return, great companies can often make up for paying a little too high of an initial price and still give you a decent return over the long run—as long as you are right about the quality of the company and its business model.
And speaking of concentration, Duca has earned his wealth through a level of concentration rarely seen in the investing world:
“We don't manage outside money. We have always had concentrated investments—and when I say concentrated investments, I'm talking about having maybe 70 or 80% of our assets in two, three, or four companies. We may own five or six companies, but 70%+ of our assets, it can be two or three or four. We talk about clarity of purpose and simplicity and focus. And we think that the most important thing in the investment business is to keep everything absolutely as simple as you possibly can. We think complexity is the biggest barrier to high performance in the investment business.”
The market this year has created some significant discrepancies between the valuations of certain large companies and everything else. If you’re going to diversify widely, opportunities abound in the small and micro-cap space, as well as a number of other sectors (such as consumer staples) if you venture outside the top few holdings of those sectors’ market cap-weighted indices.
But if you’re going to concentrate, it’s best to go deep, not wide. You need to know your companies and ensure they have advantages to protect their business models—and your capital—from the ups and downs and unexpected things that happen in the markets.
“The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.” —Warren Buffett
Tweets of the Week
In Case You Missed it…
How to Craft a Winning Investment Process and Spot World-Class Companies [w/ Reece Duca] (video)
Greenlight Capital’s Q3 Letter to Investors
CNBC LEADERS (Podcast): John Malone 11/10/23
The Investor’s Podcast: TIP587: Dino Polska: A Polish Compounder w/ Kyle Grieve
Plain English Podcast: What Most People Get Wrong About Wealth, Fame, and Happiness
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