Early on I have a relatively good idea of what my 2014 will look like. Not in terms of performance of the portfolios I manage or the markets, in general. But rather from a standpoint of focus. I am seeing my focus increasingly turn towards quality rather than quantity. This is partly due to where we are in this bull market cycle. And also it has something to do with where I am in my own cycle as an investor.
I had a conversation with an investor today regarding prospects for future returns and the engine that will generate those returns. His question had to do with how many ideas I would have to generate in 2014 in order to keep up with my performance of the past couple of years? When I told him that the portfolio you are looking at now is enough to accomplish my target returns, along with possibly 2-3 either new or recycled ideas from the past playing a part in the overall structure of the portfolio, he was somewhat surprised. I told him that I don't need 20 ideas per year that I don't understand completely or am unsure of in order to achieve returns. In fact, if anything, that type of portfolio structure tends to diminish returns as it compromises the quality of holdings within a portfolio.
If you know how to perform research, find excellent ideas, learn everything you can about all the key components of that idea and execute a strategy of diligence towards seeing the idea to fruition then why on the rolling hills of Asgard would you dilute the idea by building a portfolio of mediocre ideas? As an investor, you stick to the best ideas and eliminate the rest ideas. Otherwise, you achieve frustration instead of any measure of wealth creation. I'm not trying to be the KRS-One of finance here, by the way.
Consistent outperformance cannot be achieved by buying into any facet of traditional portfolio management. How can it? Traditional portfolio management has been proven decade after decade underperform the benchmarks. It can therefore be classified as closet indexing dumbed down. There is no magic in it. Only pain.
If you look at the list of published research in the second half of 2013, you will see that I have chosen to become much more selective in only publishing three research reports. It is not that I am trying to avoid finding new ideas. Every single day after the market closes I spend an hour running scans, shuffling through candidates and taking notes on them, just as I have been doing for years on end. None have come close to making the cut over the past couple of months. It used to be that a few came close to making the cut every month. This is a function of an environment where the risk/reward equation has become skewed, rendering the asymmetric opportunities that I lust after nonexistent.
What I have then are the current portfolio holdings, which I see as having tremendous upside. As well as past holdings that I understand thoroughly and can navigate well under most any circumstance. I don't need anything else.
I'm sure that I will discover 2-3 opportunities this year to add to the list of research reports I have published on this website since 2012. However, given the bullish market environment as well as the potential for it to continue for most of this year, I doubt that the volume of research/ideas will increase versus previous years. The trend there is certainly down.
In the meantime, my focus will be on learning everything I can about the various industries our current holdings inhabit. We have some monstrous potential in this market paired with some tremendous individual opportunities.
Stay hungry.
