I invest both in public equity but also private equity.
I raise these two points as I was recently listening to a discussion between Jerry Neumann (a very successful private equity investor) and Patrick O’Shaughnessy (CEO of O’Shaughnessy Asset Management and host of the Invest Like the Best Podcast).
The bit of the discussion that prompted this blog was the section where Mr Neumann was explaining that in Private Equity it was very important to have certain measures of potential success, but that these need not be overly complicated and that these should be considered alongside certain realities of the market.
In particular many hedge funds and investors operate with limited knowledge particularly of the future. As such the ability to spot “the next big thing” will always be limited. Given this the best way to operate was too make more rather than less investments as this increased your chance of getting “the next big thing”. Provided also that there were some thresholds to overcome first to weed out sensibly expected failures. (eg no Chinese companies listing on AIM. Not the example used but one worth considering for UK investors). IT would be a huge disservice to suggest that Mr Neumann advocated a buy anything approach he has base criteria that must be exceeded before consideration of any investment.
Certainly spreading the net increases your chance of having dogs that decline by 100% but spreading it wide enables you to hit the 1 share that rises by 400 times. This approach it was maintained in the programme was the way to be maximise your risk based return. `
Whilst this sort of approach is contrary to that espoused by Warren Buffett it is not antithetical to that of Walter Schloss. It also seems to fit well with David Gardener of the Motley Fool who quotes a great success rate (though I do not think he would consider himself to be a traditional “value” investor.
As someone who invariably feels I hold too many shares I am not sure whether I like this approach as it removes my guilt over diversification or whether I like it because it makes sense to realise I am not Warren Buffett and operate with limited knowledge and a small brain, so allowing myself to get on the ride of “the next big thing” may be more sensible than believing I can spot the route and only get on that bus that follows it.
I don’t have empirical data for this so it is only offered for consideration rather than a recommendation. If anyone wants the source it was “Invest Like the Best” podcast Episode 45.