“[Familiarity] bias occurs when investors have a preference for familiar investments despite the seemingly obvious gains from diversification. Investors display a preference for local assets with which they are more familiar (local bias) as well as portfolios titled toward domestic securities (home bias). An implication of familiarity bias is that investors hold suboptimal portfolios. To overcome this bias, investors need to cast a wider net and expand their portfolio allocation decisions to gain wider diversification and risk reduction. Investing internationally helps to avoid familiarity bias.” – H. Kent Baker and Victor Ricciardi, “How Biases Affect Investor Behavior”.
At most billion-dollar endowments for American colleges and universities up until the early 2000s or so, the only question was: “What percentage of the portfolio should be invested in stocks, and what percent in bonds?” The scope of being “original” was limited to investing in small-cap stocks, real estate investment trusts, or purchasing debt issued by a governmental entity outside of the United States.
David Swensen, who has earned 12% returns since managing a portion of Yale’s endowment in the early 1980s, gained attention for investing in alternative investments that led to outperformance of average American endowments by almost six percent annually.
When up-and-coming Western and Southern entrepreneurs wanted to kickstart their wealth-building process in the mid-1800s, they turned their attention towards one lucrative source of income—mail transportation contracts from the United States government. In 1845, Congress created something called star routes, which awarded mail distribution networks automatically to the lowest bidder with no conditions except those affecting “celerity, certainty, and security.” Each of these terms was noted on receipts with a *, and the *** led to the star-route nomenclature.
Charlie Munger had to bury his adolescent son. Warren Buffett had to deal with his mother’s mental instability and his father’s death while a relatively young man. Seth Klarman had to deal with the pain of his parent’s divorce at an early age. When Peter Lynch was ten years old, his father died of cancer. Benjamin Graham was a British immigrant following the death of his father as a toddler.
A common thread among the world’s most successful investors is that you can point to some aspect of their life in which they experienced a significant hardship. It is entirely possible that the experience of these personal hardships have contributed to their ability to be successful investors.
Between 1950 and 2000, a period that included both privately held and public trading for Monsanto stock, the compounding rate was 18.5%. It was one of the businesses that was so inherently lucrative that it was able to compound at a rate that almost tracked Warren Buffett’s accomplishments with Berkshire Hathaway stock.
The secret to Monsanto’s business success is that it was able to participate in the “toll booth” business model, which Kinder Morgan founder and CEO Richard Kinder has described as follows: “If you own a toll road, you don’t care how many passengers are in each car or what kind of car it is. You just want as many cars to move down the road as possible, and you make certain that they pay their tolls.”