158 THE WARREN BUFFETT WAY
has no need to watch a dozen computer screens at once, for the minute-
by-minute changes in the market are of no interest to him. Warren
Buffett doesn’t think in minutes, days, or months, but years. He doesn’t
need to keep up with hundreds of companies, because his investments
are focused in just a select few. This approach, which he calls “focus in-
vesting,” greatly simplif ies the task of portfolio management.
STATUS QUO: A CHOICE OF TWO
The current state of portfolio management, as practiced by everyone
else, appears to be locked into a tug-of-war between two competing
strategies—active portfolio management and index investing.
Active portfolio managers are constantly at work buying and selling
a great number of common stocks. Their job is to try to keep their
clients satisf ied. That means consistently outperforming the market so
that on any given day should a client apply the obvious measuring
stick—how is my portfolio doing compared with the market overall—
the answer will be positive and the client will leave her money in the
fund. To keep on top, active managers try to predict what will happen
with stocks in the coming six months and continually churn the portfo-
lio, hoping to take advantage of their predictions.
Index investing, on the other hand, is a buy-and-hold passive ap-
proach. It involves assembling, and then holding, a broadly diversif ied
portfolio of common stocks deliberately designed to mimic the behavior
of a specif ic benchmark index, such as the Standard & Poor’s 500. The
simplest and by far the most common way to achieve this is through an
indexed mutual fund.
Proponents of both approaches have long waged combat to prove
which one will ultimately yield the higher investment return.
“We just focus on a few outstanding companies. We’re focus
investors.”^1
WARRENBUFFETT, 1994