An Authentic Portfolio

Congruence between inner values and outward behavior allows a person to lead an authentic life — Authenticity is required for investment success as well — Authentic portfolios require a firm philosophical grounding.

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AN AUTHENTIC PORTFOLIO

Becoming a fully functioning person requires living authentically, with congruence between inner values and outward behavior. This emotional integration, a seamless connection between our inner and outer selves, clears psychological clutter, enabling an honest and grounded way of being.

Constructing a fully functioning portfolio requires a similar level of integration. Only with a seamless connection between the investment philosophy, process, and decision-making, can an authentic portfolio emerge.

Philosophy As Values

Like unwavering moral values at the root of an individual’s character, investment philosophies must provide crystal clear guidance on what is valued by an investor.

Every investor is a quality investor, and investors see quality everywhere. Moats, network effects, brands, customer loyalty, intellectual property, patents, culture, TAM, economies of scale, pricing power: a broad definition of quality allows for a single favorable attribute to win the day. If most businesses can satisfy a definition of quality, does it count?

Every investor professes to buy businesses below their intrinsic value. At a fundamental level, every investor is looking to pay fifty cents for a dollar. Yet all businesses are owned at often astounding multiples. Investors are notoriously coy about their valuation definitions – any business can trade at 15x P/E if the earnings number can be an estimate of 2028 results.

Without precise definitions of philosophical attributes, portfolios become muddled. Muddled portfolios deliver middling returns; indexes are just muddled portfolios after all, specifically implementing a non-committal investment philosophy. Philosophical goalposts must be set in stone or they become meaningless.

Connecting Philosophy & Process

Once an investor has a well-defined, immutable investment philosophy, the due diligence process can begin. With philosophical values in place, analysts know exactly what they are looking for in a potential investment.

The entire research process can then be structured around the philosophy’s core tenets, attempting to prove that an investment fits. This clarity avoids endless debates about acceptable valuation methods or standards of quality.

Having a clearly defined philosophy simplifies the research process. It narrows the range of eligible securities, allowing potential investments to be rapidly dismissed if they don’t align with the philosophy’s values. A small team, with a sharp focus, is often more effective at identifying securities that fit the portfolio.

Through this lens, the “luxury” of having large teams covering every sector and geography can become a liability. The abundance of choices provided by numerous analysts pitching their best ideas increases the difficulty in making the consistent decisions that create an authentic portfolio.

Integrating Decision Making

Living a moral, authentic life simplifies decision-making. Authentic individuals do not need to waste time evaluating decisions as choices either fit, or don’t, within their values framework. Authentic investment philosophies are these rules.

Decision-making is greatly simplified when a small team presents a limited number of ideas that closely match the investment philosophy. There is no need to debate valuation methodology for a potential investment if every business is valued in the same manner. Similarly, quality evaluation can be tied to metrics as opposed to subjective judgements. Existing holdings can be continuously evaluated against new ideas on all philosophical criteria.

“I don't look to jump over 7-foot bars; I look around for 1-foot bars that I can step over." —Warren Buffett (The Essays of Warren Buffett)

Warren Buffett often says it is simple or obvious when to make an investment. This conviction is only possible due to his clear investment criteria. Buffett does not make  tens or hundreds of decisions per day about his portfolio; his tightly defined philosophy allows for few, highly impactful decisions to guide his investments. Investing isn’t simple or obvious, but Buffett’s decision making framework is.

An Authentic Portfolio

Too many portfolios lack authenticity. Legions of analysts, driven by short-term bonuses, pitch ideas that result in momentum-driven portfolios chasing quick gains. Investment committees foster inconsistent decision-making and style drift. Poorly defined philosophies open the door for closet indexing, as nearly any investment seems to fit.

Instead, allocators need authentic portfolios featuring a tightly integrated philosophy, process, and decision-making. These portfolios faithfully reflect the investment manager’s stated style and implement it consistently across time and market cycles. Ultimately, if the philosophy is sound, such a portfolio can outperform muddled market indices and generate alpha.