Business/Finance: Just Buy the Best

Small, custom portfolios of stocks, selected for individual quality andvalue, have the ability to outperform funds of any kind, and carefulinvestors like Warren Buffett and Marty Whitman have been provingthis for many years. The key to a successful concentrated portfolio isto limit the number of stocks held, not the number of stocks considered.Entrepreneurs understand the importance of core competenciesand the importance of leveraging those core competencies inas many ways as possible. In a concentrated stock portfolio, one needsto fi nd the best values within one’s circle of competence, regardlessof size or shape. Our circle of competence is limiting enough; wedon’t need additional restrictions.We don’t care if a stock is large-cap, small-cap, or beanie-cap;we use a broad range of criteria for judging its potential risks andrewards. Limiting ourselves to a certain size of company makes nosense to us. Rather, we seek to understand the company’s value, competitiveadvantage, culture, management, industry, vision, and so on.We urge investors not to tie their own hands by getting caught upin “convenient handles” like large-cap value and small-cap growth.Reducing our investment philosophy to its simplest terms, we advocatethis: “Just buy the best.”Johnson & Johnson (JNJ) is a component of the Dow JonesIndustrial Average (DJIA), but as you can see, JNJ handily outperformsthe group as a whole (see Figure 5.1). This reinforces ourdesire to seek out and invest in the best individual companies ratherthan broad categories.Our disdain for mutual funds moderates slightly for index fundsbecause of their lower fees, but as you can see, JNJ has deliveredconsiderably better returns than the DJIA and, by extension, indexfunds approximating the DJIA. Moreover, the safety investors seekthrough the built-in diversifi cation of index funds is, to some extent,achieved through the scope of JNJ’s multiple business units in pharmaceuticals,medical equipment, consumer goods, and the like.When we say “just buy the best,” we’re recommending the knockoutcombination of a concentrated portfolio, a go-anywhere style,and a research methodology that prioritizes intrinsic value, marginof safety, and upside potential. This captures the key attributes of theentrepreneurial investing style: focus, opportunism, and personalinvolvement.+750%+600%+450%+300%+150%+0%93 94 95 96 97 98 99 00 01 02 03 04 03 05 06 07JNJ DJIAFigure 5.1 One Dow Stock vs. a DJIA Index FundData Source: FT Interactive Data via Capital IQ, a division of Standard & Poor’s