Key Principle No. 3

Invest only in what you can understand.

A good investor must understand his limits.  As a generalist, he must realize that some companies, and even entire industries, are just too complicated.  The amount of information available about a company can also vary significantly.  Deciding how much information is enough, is a constant battle for value investors

We believe that good investors must be generalists. The knowledge required to understand certain companies and industries requires a specialist.  The problem with being a specialist is that you must either hold and undiversified portfolio, or be willing to use stocks recommended by others with little of your own research. We cannot recommend such approaches.

Generalists also get to compare valuations and prospects across many different industries.  In the long run this leads to better decisions.

As we build our model portfolio we will show many examples where we simply say, “We pass.”

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