Rework by Jason Fried is one of the best books I have ever read on starting up. Jason has condensed his wisdom in starting and running a business into pithy, one-page, chapters.
One of the interesting chapters from the book is about the idea of being a curator. In this, Jason writes –
You don’t make a great museum by putting all the art in the world into a single room. That’s a warehouse. What makes a museum great is the stuff that’s not on the walls. Someone says no … There is an editing process. There’s a lot more stuff off the walls than on the walls. The best is a sub-sub-subset of all the possibilities.
Re-reading this chapter reminded me of Costco, one of the world’s largest wholesale retailers and among the very few that have shown remarkable resilience in an industry that has been subjected to increasing pressures from online retail.
In fact, Charlie Munger has often suggested that Costco is his favourite company outside of Berkshire Hathaway and “one of the most admirable capitalistic institutions in the world.”
Now, of all the reasons that Costco is so successful – membership model, low-cost offerings, high-quality management, great culture, etc. – one that stands out in the context of this post is that Costco sells much lesser varieties of much lesser number of things than its peers. In other words, Costco may sell just three brands of tomato ketchup as compared to its competitors like Walmart and Target that may stock twenty varieties and sub-varieties of the product.
As an example, see how a chocolate section at Costco looks like –
And here is the one at Walmart –
In a way, Costco is like a museum (compared to Walmart being a warehouse) that only stocks the fastest-selling models, sizes, and colors of a limited number of products. This enables it to sell inventory quickly, limiting its investment in working capital. Subsequently, even at a low-profit margin, Costco generates outsized returns on invested capital (28%, versus Walmart’s 12%) – a sign of a great retailer.
Someone early in Costco’s life must have said ‘no’ to building another Walmart-like model, and that’s one of the biggest reasons it has done so well over the years.
“It’s the stuff you leave out that matters,” writes Jason in Rework.
When you apply this crucial lesson to building your stock portfolio, it means that you are likely to succeed as an investor not just by the stocks you own, but more importantly by the ones you don’t.
But often, we end up building warehouses of our portfolios, not curated museums. A stock is followed by another, then another, two more, three more, and on, and on, and on. Some people even maintain multiple portfolios, and each looks like a zoo of mismanaged, rowdy animals.
People buy stocks for all kind of reasons – they like them, their neighbours like them, their friends are making money on them, someone on Twitter is shouting about them, their prices have risen sharply in past few months, someone recommended them on TV, someone wrote about them on online forums, someone is boasting about them on WhatsApp groups, etc.
In the end, here is how such portfolios come to look like –
I read somewhere that we spend the first half of our lives adding things, and the second half subtracting most of them.
Investing follows life, and this is also what a lot of investors end up doing. They create crowded warehouses of portfolios in the initial years of their investment careers, realize most of their choices were mistakes, and then they start subtracting vigorously.
Lest you lose out on the positive compounding timeframe, you will do yourself a world of good by respecting and practicing this lesson – of saying no to most things, of not adding a lot of unwanted stocks to your portfolios – early.
In other words, be a curator of stocks, not a warehouse manager.
As a starter, use the following checklist to start your stocks’ curation process. Run it on your existing portfolio to test which of your stocks must remain with you and which must be subtracted out.
Bruce Lee got it dead right when he said –
It is not daily increase but daily decrease, hack away the unessential.
This is one of the most critical lessons I have learned and practiced in my life and as an investor. And that has helped me simplify my life considerably and brought me tremendous peace.