Benjamin Beck, CFP®As advisors, our role is to put our clients in front of positive investing opportunities. Our work is to use our disciplined process to unearth opportunities for positive growth.
At Beck Bode, we believe that a portfolio shouldn’t have a pro-rata representation of every single company across the markets. When I explain this to people who are new to the concept, I like to use the example of a Major League Baseball team. Say you’re the owner, and you’re choosing your players. Do you select them based on a certain baseline (average) performance, or do you choose a wide array of different level players? Are you willing to focus your dollars on attracting the elite players, or are you the type who, with a good amount of research, is willing to take a chance on players predicted to have very, very bright futures?
Several years ago, I actually did a comparison of an All-Star team versus the League average. The batting average in the American League at the time, I think was somewhere around 260 or 270. So, 26 times out of a hundred, they were successful, they got a hit. The other 74 times, they failed. Now the folks representing the All-Star team, their batting average was somewhere around 320. At first glance, the difference doesn’t appear significant, but certainly, if you follow baseball, there's a huge difference between a batter hitting 260 and a batter hitting 320. Over the course of the year, it sure adds up.
Baseball being baseball, and life being life, the owner knows that things are going to happen. We just don’t know what. Maybe a player is going to get injured. A highly touted player is not going to work out for whatever personal reason. But having the right mix of athletes on the team is key, because you only need one or two of the 15 or 20 players to have an incredible year for it to have a huge impact on the team’s season.
I love using this example because it lines up nicely with how many stocks we believe should be in a portfolio: right around 15. We’re not talking about hundreds (thousands, sometimes!) of stocks in a mutual fund. We are just dealing with 15. And out of our 15 stocks, we need only a few winners for it to make a difference on the entire portfolio.
In baseball, in order to find the best players, the best organizations have the best scouting departments. They invest heavily in the most thorough analysis. Beyond scouting for talent, professional athletic enterprises take “R&D” very, very seriously. For them, research and development equates to player development, at Spring Training complexes. This is a huge business, and there is no skimping when it comes to vetting and preparing the players.
Then again, there are other teams that don’t take this route. In any given year another team may spend an inordinate amount of money buying the best players based on last year's performance. Those players of course come with a hefty price tag. Perhaps the team that is willing to buy talent is thinking, "Well, we're going to go buy the best, and we’ll make it happen this year." More often than not, this thinking falters in the execution phase.
To continue with the baseball example, think back to the Marlins in the early 2000s. The Florida Marlins won the World Series in 2003. They also managed to go from first place to last place in the League within a single year. What a great lesson on historical performance versus future potential! Looking at this radical drop, one might say it’s important not to go out and take risks based on historical performance. Perhaps it would be wiser to take a risk on players who may not necessarily have the best track record yet have the tools that make them very attractive in terms of future performance. That ‘edge’ could be age, it could be qualitative aspects of how they train, and so on.
In our line of work, we categorically reject the widely-held belief in the industry of “investing not to lose.” Fear of failure doesn’t hold us back. We aren't willing to forgo winning, simply because of the risk of making a mistake here and there. Good teams pick solid players, knowing that in any given season, they’re going to have a few stars, and a few duds.
Around here, we like to say: "We make money when analysts make mistakes." For those of you who are unfamiliar with our investment methodology, we will not buy a stock until an analyst has revised their earnings estimates for the future, not once, but twice in a six-month period. This means that the analyst originally thought that a company would be announcing X, but then came back and said, “Sorry, actually the company is going to do better than we originally thought.” And we wait for them to make this mistake twice. There’s a method to the way we do things. It’s based on an incredible amount of high-quality research, and if there’s one thing we have in spades it’s discipline.
Add it up: intensive, high-quality research, a fully transparent, proven and data-backed process, and a disciplined commitment to buying and selling based on a set formula means that we can afford to take risks to identify companies that have the brightest futures according to the information that we have in hand today.
We’re happy to leave the business of averages to the other guys.
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.
