Warren Buffett used to quip that the best stock to buy was one that you already owned in your portfolio because you cannot expect that your eighth, twelfth, or twentieth idea will ever be as good as your best idea. Sometimes, investors get this idea that they always need to be on the move towards the next “new” investment, when really, the best stock to buy could simply be adding to something that you already own.
It’s a phenomenon that I’ve certainly seen play out before in my case studies. In 2004, Charlie Munger gave Li Lu of Himalaya Partners approximately $98 million to invest on behalf of his family. The funds came with one notable string attached, as Munger required Lu to promise to close down the fund to new contributions and only manage the money that he had received from other partners to date.
Since that time, Munger’s money has compounded at a rate of 23.2% under Lu’s management. These results over an approximately decade-and-a-half stretch are obviously remarkable.
But you know what else is interesting? The mechanics of Lu’s outperformance. In 2004, he took $40 million of the fund and invested it into BYD stock (which is a car and personal device battery manufacturer that specializes in cutting-edge renewable and lithium battery technologies) that is now valued at almost $500 million today.
If that investment did not happen, Himalaya’s return would be 7.6% since 2004, trailing the S&P 500 Index by a single point. I don’t think I’m even making an observation that Li Lu would disagree with. He remarked, ostensibly in regards to the singular success of BYD stock in contributing to his successful investment record, “You may very well work extremely hard and seldom score. But occasionally—very occasionally—you get one or two great chances and you make decisive strikes that really matter.”
In my own life, I’ve always found the “Pareto principle” (which could be applied to suggest that 20% of our investment funds will be the driver of 80% of our returns) to be the most bewildering gravitational force to address. I have a strong tendency to think linearly and assume that good process plus co-equal effort will need to nearly identical results, but to paraphrase Mark Twain, it just ain’t so. Things like buying Visa stock and Nike stock and Charles Schwab stock in the past few years, and Becton Dickinson stock and Bank of America stock and Disney stock almost a decade ago, have played an important role in my investment record and my returns would be noticeably to the worse without them.
But out of necessity, I’ve acknowledged the reality and it’s been incorporated into my investing framework. I do not rebalance, ever. I suppose, as a theoretical condition, I would do so if a singular investment or two would wipe me out if it failed or lead to a sharp decrease in standard of living. There is a point at which there becomes a priority shift towards “preserving wealth” rather than “creating wealth” but I see too many people define that point too early in the cycle, giving up an ownership position in an excellent business that is growing exactly as you hoped it would while years and years of double-digit growth continue to lay ahead of it.
I see these robo-advisors that talk about annual rebalancing of the biggest gains and I can tell that is just a “service” being offered to justify the robo-advisor’s fees when greater wealth would come from allowing the outperformers to continue growing. The best financial advisors may be those who appear to be doing the least amount of work for their clients, saying, “Yeah, we are going to collect that Nike dividend here in a month and do the same thing three months after that. If the price falls down to the $70s again, we’ll probably add more. We’ll see.”