#69 - Revisiting the purpose of journaling

Why do I write?

A long, long time ago I tried to justify the existence of this “blog” if you want to call it that. I wrote about it here.

Like many first attempts, it was probably not the perfect answer. Probably overcomplicated too (especially the part about ego).

Today, I feel that this place is where I come to when I have read, heard, or watched something important that I don’t want to lose.

So it’s just a way for me to store important information.

I realized this because I was looking for a paper written by Geoff Gannon from Focused Compounding. I was lucky enough to remember what to google to find it, but for a minute there, I was nervous that I might not be able to find it again.

Once I found it, I immediately had the urge to come here and write about it.

Geoff Gannon: How to Invest…

…When You Only Have an Hour a Day to Do It.

Here’s the link.

This paper made me think about diversification, a topic that’s been on my mind lately.

Chris Mayer mentioned in this interview with Brian Feroldi that owning more than 20 stocks doesn’t make sense, mainly because it becomes really hard to deeply understand and track so many businesses.

That’s a valid point in itself.

Geoff mentions that there is no point in owning more than 20 stocks - it doesn’t add to your expected return, and it doesn’t reduce your risk.

Also a perfectly valid point.

So we now have two solid reasons not to go over 20.

Why a focused portfolio is better

I read somewhere about how Mark Leonard found out that when they reduced their hurdle rate on some of their investments, the IRR on ALL of their investments decreased.

That’s weird. Why would that be?

I think the explanation has to do with discipline. If you allow yourself to take OK (not great) deals in one area, that mindset will eventually percolate into other areas.

Applying the same idea to an investing portfolio, the more stocks we own, the more pressure we’re putting on ourselves to lower our hurdle rate.

Every single stock we add to the portfolio is like a drop of rain that falls on a rock. We might not feel any effect right away, but it erodes it over time.

If the rock is our hurdle rate, we should protect it from less-than-great ideas - drops of water that contain impurities or whatever it is that will erode a rock faster.

This is why I want to start thinking about reducing the number of stocks I own so that I am forced to keep the very best.

Diversification implies making compromises, hence diworsification. I’d rather aim for a no-compromise mindset.