160 THE WARREN BUFFETT WAY
out that there is a third alternative—a very different kind of active port-
folio strategy that signif icantly increases the odds of beating the index.
That alternative is focus investing.
FOCUS INVESTING: THE BIG PICTURE
Reduced to its essence, focus investing means this: Choose a few stocks
that are likely to produce above-average returns over the long haul,
concentrate the bulk of your investments in those stocks, and have the
fortitude to hold steady during any short-term market gyrations.
The following sections describe the separate elements in the process.
“Find Outstanding Companies”
Over the years, Warren Buffett has developed a way of determining
which companies are worthy places to put his money; it rests on a no-
tion of great common sense: If the company is doing well and is man-
aged by smart people, eventually its stock price will ref lect its inherent
value. Buffett thus devotes most of his attention not to tracking share
price but to analyzing the economics of the underlying business and as-
sessing its management.
The Buffett tenets, described in earlier chapters, can be thought of as
a kind of tool belt. Each tenet is one analytical tool, and in the aggregate
THE FOCUS INVESTOR’S GOLDEN RULES- Concentrate your investments in outstanding companies
run by strong management. - Limit yourself to the number of companies you can truly
understand. Ten to twenty is good, more than twenty is
asking for trouble. - Pick the very best of your good companies, and put the
bulk of your investment there. - Think long-term: f ive to ten years, minimum.
- Volatility happens. Carry on.