Win, Place and Show
I'm not a huge horse racing fan. Which isn't to say it's not a great sport. It's just that I didn't grow up in Kentucky and don't feel knowledgeable enough to bet the ponies. But I do like watching the Triple Crown racing events. You know, the Kentucky Derby, Preakness Stakes and Belmont Stakes. It's possibly the best 2 minutes of spectating in sports. Train for months, then a mad dash for a couple of minutes. That's got to be nerve-wracking for the jockey, owner, trainer, bettors and spectators. The horse? Not so sure they get as worked up. But what do I know?
This year was special as California Chrome won the first 2 events, the Kentucky Derby and the Preakness. So the excitement leading up to the Belmont Stakes on June 7th was way above normal. Why? The last Triple Crown winner was Affirmed. The year? 1978. Triple Crown winners are like comets, they don't come around very often. The racing world has produced exactly 11 Triple Crown winners, the first being Sir Barton way back in 1919.
If you've watched a horse race you've probably noticed the funny thing they wear on their head. Blinders (also called blinkers in some circles) have a purpose, and that's why horses wear them.
First, a little horse anatomy. Horse eyes are on the side of the head. Why? They are prey animals and need excellent peripheral vision for protection from predators. As a result, horses have around 350 degrees of vision. I know, wow! But it's true, look it up. Binocular vision is 65 degrees, and monocular or single eye vision is the remaining 285 degrees. Anyway, when you are heading down the backstretch at Pimlico (where the Preakness is held) during your 2 minute sprint toward fame and fortune, the last thing you want is a wandering eye. You, Mr. California Chrome, need focus. And your blinders will do the trick.
Investing is also about focus. Last I checked roughly 15,000 publicly-traded companies exist in the United States. For the truly ambitious around 63,000 public companies exist worldwide. Who in the world has time to dig through all that? No one, that's who. Even Warren Buffett has limits. Buffett refers to his "circle of competence" as those companies he can understand, and doesn't move beyond a group of a few hundred companies.
We wear our own form of custom-made Triad racing blinders. We have a relatively small universe of around 250 companies where we spend the vast majority of our time, and pay casual attention to the other 14,750 public U.S. companies. How can we follow more companies than Mr. Buffett? He plays bridge. We don't.
A side benefit of focus is this: by forcing ourselves to spend time on important tasks like reading company annual reports, SEC filings such as 10-Ks and proxy statements, not only do we gain greater insights into our little universe through constant study, but-and this is a big but-we "crowd out" of our schedule the opportunity for our eyes to wander and lose focus. We simply don't have enough time in the day to tune in to CNBC, listen to Jim Cramer, watch his lightning round and shout a few booyahs. It's sort of like eating: if you force yourself to eat only nutritious food, there shouldn't be much room for junk food. Did I just call Jim Cramer junk food? Sorry Jim.
If you do the math, we spend our time with just under 2% of the U.S. public company universe. We think that's very focused. And necessary. Just as bettors at the track are betting against each other rather than the "house", investors bet against each other. Our "winner's" edge is better understanding and laser-like focus. With focus comes increased odds for success. And while Triple Crown winners are rare, our goal is to marry a sound philosophy with a repeatable process to create superior long-term results. As The Most Interesting Man in the World might say, "stay focused, my friends."
-John Heldman, CFA