How many strangers do you know? This isn’t some Zen riddle, but this question is trickier than the gut answer of “zero.” At one point, wasn’t your best friend a stranger?
As we meet new people, we may decide to remove the “stranger” label in favor of “acquaintance.” We learn the basics of the person at that point—name, occupation, and so on. We may develop a closer relationship, learning more intimate details. How’d they get where they are? And how are things going now?
We take a similar approach when building portfolios. When an investment opportunity arises, we may or may not have any prior experience with the company. We start by getting to know the basics—what they do, why they do it, how long have they done it, and so on.
From there, we may opt to remove that “stranger” label and start going deeper. When getting to know a company, understanding the company’s management, cash flows, and debt loads gives us a clearer picture. Only then does a company have a chance to enter your portfolios—the real inner circle!
Our relationship with the company doesn’t end there. Quarterly, we review each holding—making sure their business hasn’t deviated too far from what we expected. We check whether our understanding of the fundamentals is playing out.
Why does all this matter? Well, especially in the bumpiest of economic times, you don’t want any strangers in your portfolio. A swift change at the macro level can completely upend a business model. One thing that helps us weather the storms is knowing how our crew might navigate their way through them.
Being friends with the companies you own—being familiar with the details of their operations—helps prevent some of those big surprises in the long run. (Of course, it never eliminates the possibility of a surprise; friends can change and friends can make mistakes).
But, in the long run, it may pay to be careful of the “company” you keep.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
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