Welcome to Episode 141 of Special Situation Investing.
Reflecting on last year’s results and my goals for the coming year brought me back to one theme over and over again, concentration. Compounding money at 26% per year for any length of time instantly qualifies an investor for “Hall of Fame” status, and yet, picking any single investment that returns 26% in a single year is not terribly difficult. How can picking a 26% return investment be achievable while at the same time an overall portfolio return of 26% be so difficult to accomplish? The answer, concentration. Few investors are willing to put all of their eggs in one basket, and the odds of achieving legendary returns drops with every basket you collect.
Consider the following, how many biographies have you read about investors who diversified their way to great fortunes? I’m not even sure if there are biographies about such investors or if such investors even exist. What is common, on the other hand, are biographies of entrepreneurs and investors who followed a highly concentrated and narrow path to superior returns.
The merits of concentration are abundantly clear as soon as we frame the concept outside of investing. Imagine starting off the new year with one hundred separate but related fitness goals. The goals all center on fitness but they include fat loss, muscle gain, diet changes, and all of the other metrics that could possibly be tracked in relation to health. It should be obvious that a person with one hundred different but related goals is not going to make a whole lot of progress, even if the goals are similar in nature.
A focused person, on the other hand, is more likely to achieve their singular goal, and oddly enough, more likely to achieve one hundred other related goals as well. A single goal, to drop ten minutes off of your 10k run time, will likely result in weight loss, muscle gain, improved diet and one hundred other things too. Things that could have made up countless other goals.
This simple thought experiment should teach us something. Clearly defining your objective and concentrating solely on its attainment is the only way to achieve great things. “But unless I diversify, I run the risk of failure,” you might protest. And to that I would reply, “Yes you do run the risk of failure, but failure is assured if your goal is out performance and your method is wide diversification.” You can’t do mediocre research on one hundred different investments and expect to compound capital at 26% per year, it simply isn’t going to happen.
There is a highly contagious delirium circulating among investors which leads them confused about their true objective. Rather than compound capital at a high rate or return, investors strive instead to be all knowing fortune tellers. Investors predict the direction of the economy, the strength of the dollar, the future performance of twenty different companies and countless other things. These are distractions from the true goal of out performance.
This year, put as much of your investable capital into bitcoin as possible. By January of 2026, your returns will likely be better than the S&P 500 and better than the returns you are otherwise going to get. This halving cycle is still in its early stages and political support for the asset has never been higher. Despite bitcoin trading near its all time high, it remains a fantastic investment going forward.
If you felt yourself seize up reading the last paragraph, which I added for effect, that might be an indication that absolute returns are not your primary goal. Concentrating heavily on superior investments that you clearly understand is the obvious path to out performance but following through with that strategy tends to wreak havoc on an investors psychology. If it didn’t, there would be more people compounding money at double digit rates. Instead, most investors make modest overall returns while patting themselves on the back for having put half a percent of their net worth into something that grew by 5x.
It’s your total return that matters not how smart you are or how accurately you predicted future economic events. The guy who bought AutoZone twenty years ago compounded his investment at a 20% CAGR for two decades straight, not just because he was smart, but because he actually made the investment, and made it in a big way.
Smart is a good thing, and finding great investments is a good thing, but they aren’t the objective. Out performance is the objective and the road marked diversification doesn’t lead there. Can you focus and still fail? Absolutely, and that possibility should drive you to put serious effort into the task at hand because you are in a serious business that deserves your full attention.
With that, we hope you enjoyed the podcast. We hope your returns from last year were fantastic and that this year you are highly focused and ready to set new records for yourself. We’ll see you again in a couple weeks.
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