Three Decades of Concentrated Investing

For most of my career I have made between two and three investment decisions a year. By the standards of professional money management, this is almost laughably low. The industry is structured around motion — quarterly performance, daily liquidity, monthly client letters, weekly meetings. There is enormous social and structural pressure to do something. Two or three decisions in twelve months is a confession of inactivity.

I have come to believe that inactivity is the work.

When I founded Deccan Value Investors in 2004, I did so with a particular conviction about how concentrated investing should be done. After roughly a decade as an analyst, portfolio manager, and team leader at firms on both the East and West Coasts, I had watched a great many investment decisions — my own, and those of people I admired — and the ones that compounded in interesting ways were almost always the ones that were waited for. The bad decisions were almost always the ones made in a hurry.

That observation became, in slow motion, the operating principle of the firm.

On concentration

A typical Deccan portfolio holds five to ten positions. People sometimes assume this is a posture — that we run concentrated to look bold. The reverse is true. A portfolio of five to ten positions is, for me, a confession of what I actually know. I am not capable of holding well-formed views on twenty or thirty companies at once. The world is large; my attention is finite. The math of concentration is the math of attention divided by available time.

When I am working on a name, I am living with it. I am reading what management says, and what they did the last time they said something similar, and what their suppliers say about them, and what the people in their industry — not the analysts who cover them, but the ones who do business with them — actually think when no one is taking notes. This kind of work compounds on itself, and there is no shortcut.

If I tried to do this for thirty positions, I would do none of them well. So we hold five to ten, and we hold them long enough for the work to matter.

On the two-or-three rule

The two-to-three decisions a year is not a target. It is an observation about how often, in a year, the work actually produces a decision worth acting on. Most of what we do is reading, thinking, discarding, and waiting. We say no a great deal, including to investments we believe will go up. The hurdle is not will it work. The hurdle is do I understand it well enough to know why it should work, and what I would be wrong about if it does not.

That second clause is where most of the discipline lives. I want to be able to say, in plain language and in advance, what would falsify my thesis. If I cannot, I am not ready. If I am ready, I want the position size to reflect the conviction — which means the position has to be one of only a few.

Both rules — the five-to-ten and the two-or-three — are really one rule expressed twice. They are the rule that says: you cannot have an opinion you have not earned, and you cannot earn opinions in bulk.

On geography

I have been fortunate, across the arc of my career, to invest in companies in more than thirty countries. This is not a strategy of geographic diversification. I am not allocating to Emerging Markets or Europe ex-UK the way the consultants’ charts depict it. I am following business quality and price wherever they happen to be — and they have happened to be in unexpected places.

The lesson from that experience is humbling. The best businesses I have held have rarely been in the obvious markets. They have been in jurisdictions that were under-followed, mispriced because of being unfamiliar, or simply too small for the institutional infrastructure to bother with. Unfamiliarity is a friend to careful investors. It is not where you make the most reputational gains, but it is often where you make the most economic ones.

The other lesson is about the nature of moats. You learn what makes a business durable by watching companies in many different competitive ecosystems try to defend themselves. You see what works in mature US markets, what works in fast-changing emerging ones, what holds up under regulatory disruption, and what does not. After thirty countries, a sense of what a real moat looks like becomes both broader and stricter.

The shape of the work

A typical week at the firm looks unglamorous. There is a great deal of reading. There are conversations with operators — far more than with sell-side analysts. There is a fair amount of just sitting with an idea, sometimes for months, before it becomes clear whether to act. There are also long stretches where the right answer is to do nothing at all.

The discipline that is hardest to maintain is not finding good ideas. It is not acting on good-but-not-great ones. The cost of acting on a B+ idea is rarely the loss it produces in isolation. It is the loss it produces by absorbing one of the ten slots — the slot that should have been waiting for the A idea that comes along eight months later.

This is why patience is not a soft skill in this work. It is a structural feature of the strategy. If you do not have it, the math does not work, no matter how good the analysis is.

On partnership

The other thing I have come to believe, over three decades, is that this kind of investing requires a particular kind of client relationship.

Concentrated, long-horizon investing produces results that are lumpy in the short run. There are quarters, and sometimes years, in which a portfolio of five to ten positions will be uncorrelated with whatever the broad market is doing. If the people you are investing for cannot tolerate that — and many cannot, for very good reasons — then the work does not function. The strategy cannot be defended on a quarterly call to an investor whose horizon is the next quarterly call.

So I have always tried to build partnerships, not just an investor base, with people whose own time horizons match the strategy. That has meant being slow about taking on capital, careful about with whom, and explicit up front about what kind of patience we are asking for. The clients who have been with Deccan a long time have generally been with us through periods when patience was the only thing keeping the strategy intact. They are partners in the work in a meaningful sense.

I do not think there is a better return on a career than to be able to do the work you believe in, alongside people who actually want it done that way.

Vinit Bodas is the founder, president, and chief investment officer of Deccan Value Investors L.P. The firm is based in Greenwich, Connecticut. More on the Vijaya Foundation — the family foundation he and Uma Bodas established in 2006 — appears separately on this site.