I strongly believe that adding weights at the appropriate places is the most important element in our lives, and more so in investing.
"Adding
weights" means that in anything that we think about , there are always a
few factors which carry most of the freight. If we are thinking about
risks, there would be a few risks that would determine the beauty or lack of it in a business. If we think about
opportunity size or tailwinds, again there would be a few factors which
would determine which way the scale tilts. And the same goes with
position sizing in the portfolio: a few positions where the investor has
the strongest conviction (with minimal risk) will determine if the
returns are better than average. I think the concept of
adding weights is universally applicable in whichever field we operate
or whatever decision we think about.
This is nothing new. It is just Pareto's principle described from a different view-point.
Our job as an investor is to carefully
determine which factors should carry the maximum weight. Adding weights
without careful consideration can make sure that the disadvantages also
get out sized. Looking at a good business but getting stuck with
manager remuneration which is a few percentage points higher than
average is a classic case of adding weight on the wrong side, in my
view.
Like
the game of fruit ninja, we should develop the art of quickly slicing away
the factors which are benign or non-core. And then spend a large amount
of time, attention and thinking power on factors that are the heaviest.
