Should I Specialize in an Industry I Know – Even if it’s a Bad One?
A 12-minute read
Hi Geoff,
I think you have touched on this before but I will ask a bit more detailed. Do you think it’s better to be an expert on one industry and the stocks within that industry vs knowing a little about many industries? What about if that industry is a “bad” industry like shipping? Would you still think an investor is better off knowing everything about that industry and the stocks vs being a generalist?
I guess that having a deep knowledge and circle of competence you would have an edge compared to other investors. Being a generalist you don’t really have an edge?
I think it’s usually better for an investor to be a specialist than to be a generalist. If you look at some of the investors who have long-term records that are really excellent – I’m thinking specifically of Warren Buffett and Phil Fisher here – their best investments are in specific areas of expertise. Buffett’s biggest successes tended to be in financial services (banks, insurance, etc.), advertiser supported media (newspapers, TV stations, etc.), ad agencies (also very closely connected to media companies), and maybe a few other areas like consumer brands (See’s Candies, Gillette, Coca-Cola, etc.). Other gains he had came from use of float (which is a concept closely tied to insurance and banking – though he also used Blue Chip Stamps to accomplish this) and re-deployment of capital. At times, he liquidated some working capital positions of companies and put the proceeds into marketable securities (a business he knows well). Overall, the Buffett playbook for the home runs he hit is fairly limited. It is very heavy on capital allocation, very light on capital heavy businesses, and it is pretty concentrated in things like media, financial services, and consumer brands. There are some notable and successful exceptions. It seems that Nebraska Furniture Mart (by my calculation) was a very successful investment. However, Buffett’s other retail investments generally were not. By comparison, he hit several home runs in newspapers – Washington Post, Buffalo Evening News, and Affiliated Publications. Several home runs in non-insurance financial services (owned a bank, owned an S&L, invested in GSEs, etc.). Several home runs in insurance (National Indemnity, GEICO, etc.). If you look at Buffett’s record in holdings of more commodity type companies, when he held broader groups of stocks, etc. – it’s not as good. As far as I can tell, the retail/manufacturing parts of Berkshire today don’t have very good returns versus their original purchase prices. It’s not all that easy to be sure of this given the way the company reports. But, I don’t think there are a lot of home runs there.
Phil Fisher talks about how he focused on manufacturing companies that apply some sort of technical knowledge. This is interesting, because people think of him as a growth or tech investor – but, he thought of himself as investing in technical manufacturing companies. But, specifically – manufacturing companies. He didn’t …
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