How good is your 40th best idea?
At Dock Street, we’re trying to own the best businesses we can find. And the best ones are rare. Right now we own less than two dozen companies.
This may seem to fly in the face of the typical investment wisdom about diversification, but two points tip the scales in the other direction.
First, how good is your 40th best idea? You should probably have stopped before that many.
Second, did you know that the Dow Jones Industrial Average is very well correlated with the S&P 500? In other words, the Dow Jones list of 30 stocks basically moves in the same way as a much more diversified list of 500.
The reason why most investors want to diversify and own a lot of different companies is because that reduces the risk of any one of those companies negatively impacting their portfolio. But there’s a better way to reduce that risk—by owning better companies.
The stocks that go down and stay down have one thing in common—those companies aren’t succeeding. Whereas when companies consistently grow their profits over time, their intrinsic value increases. That isn’t to say that successful businesses can’t see their stock prices experience volatile downturns. They can and do. But if a business keeps succeeding it won’t stay down.
The true risk to client capital is the risk of permanent losses. By owning an exclusive collection of extremely profitable and growing businesses, we take significant steps away from the potential for permanent losses.
We’re picky with where we put our clients’ money. We can’t picture doing the opposite.
Best regards,
Evan McGoff
Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.
It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise.
To the extent that a reader has questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional advisor of their choosing.
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Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.
