As a share investor there is a long list of sectors and industries he won\u2019t consider including banks, commodity producers, retail, airlines, insurance, utilities and media.<\/p>\n
I also like eliminating investments from consideration. It makes my life easier and ensures my portfolio is focused on what I want to achieve. <\/p>\n
Early in 2025 I wrote about my avoidance of actively managed products, bonds and shares that don\u2019t pay dividends<\/a>. <\/p>\n I still avoid all three. Today I\u2019m adding two more types of investments you won\u2019t find in my portfolio \u2013 banks and private investments. <\/p>\n What about diversification? <\/p>\n Eliminating wide swarths of the market from consideration is not what most investors are taught. The standard investment advice is to diversify widely. Spreading your bets to as many different types of investments possible is portrayed as an investing magic trick where risk is reduced without impacting returns. <\/p>\n Yet Hohn\u2019s approach and Warren Buffett\u2019s exhortation to stay within a defined circle of competence flies in the face of this guidance. They both choose to fish in a smaller pond. A meaningful caveat is Hohn and Buffett are two of the best investors ever \u2013 does this advice apply to us mere mortals?<\/p>\n I think it does. The \u2018risk\u2019 that owning a bit of everything is supposed to reduce is volatility. For some investors risk and volatility are the same thing. For most investors volatility is only a risk as you approach a goal. <\/p>\n Over the long-term the risk most people faceis not earning a high enough return to achieve your goal. In this context risk is not the variation of returns over different time periods. <\/p>\n Given that I\u2019m a long-term investor and not particularly concerned with volatility my focus is on earning a high enough long-term return to achieve my goal. Within the larger universe of investments that meet this criteria I seek opportunities I understand. <\/p>\n This seems obvious but too many investors buy things they don\u2019t understand or try to solve investment problems they don\u2019t face. This happens because the investment industry is good at selling complexity and inventing new products. Wave the carrot of vast potential riches or the stick of potential devastating loses and investors will buy almost anything. <\/p>\n Successful investing is often just following the KISS principle. Find solutions to the problems you are trying to solve in the simplest, cheapest and easiest way possible.<\/p>\n Investments I won\u2019t own: Banks<\/p>\n I was burned by banks in the global financial crisis (\u201cGFC\u201d). My largest position – Citi – dropped 98% between 2007 and 2009. This happens from time to time and is all part of being an investor. But after going through that experience I spent some time reflecting on what happened. <\/p>\n I knew the US housing market was getting crazy \u2013 it was obvious to everyone. The implications were less clear. <\/p>\n The banks and the regulators were adamant that any defaults would be mitigated by sophisticated risk management and ample capital reserves. I knew the banks were incentivized to talk up their own stock and the regulators wanted financial stability. But in retrospect it occurred to me there was no way I could independently evaluate if any of this was true. <\/p>\n Citi\u2019s annual report from 2007 is 208 pages long. The section on the balance sheet spans 31 of those pages. <\/p>\n I studied accounting during my MBA and it was part of the CFA curriculum. I\u2019m not completely ignorant of accounting rules but wading through footnote after footnote makes you want to lay down in traffic. Most analysts couldn\u2019t figure out the real risk either. <\/p>\n This wasn\u2019t a design flaw, it was a feature. Banks are complicated and opaque. This lack of transparency in an industry that throughout history has periodically taken on excessive leverage which sometimes leads to failure is not ideal. <\/p>\n Banking has an inherent principal-agent problem to a degree that isn\u2019t found in most industries. Certain bank employees are inclined to lend and invest shareholder funds aggressively with the hope of getting higher bonuses. <\/p>\n The GFC may have been an anomaly given the scale of the issues but history is littered with problems in the banking industry. I am happy to take on risk to earn returns but I don\u2019t think avoiding banks is hurting my outcomes. <\/p>\n Since 1994 the MSCI World Banks index has underperformed the MSCI World index by 2.01% annually. In Australia over the past decade the S&P\/ASX 200 index has narrowly outperformed the S&P\/ASX 200 banks index as well. <\/p>\n Just because I don\u2019t own bank shares directly doesn\u2019t mean I have no bank exposure in my portfolio. I own index funds that contain banks. I\u2019m just not comfortable picking individual bank shares. I\u2019ve put them in the \u2018too complicated\u2019 category. <\/p>\n Investments I won\u2019t own: Private investments<\/p>\n Offering individual investors access to private investments like venture capital and private equity is all the rage. On the surface this is a good thing as it provides choice and returns have been strong. <\/p>\n However, JP Morgan measured the dispersion of returns for private equity between 2000 and 2020 and found the average annual difference in returns between the top quartile and bottom quartile funds was 13.71%. The dispersion in venture capital is even more extreme. <\/p>\n That level of return dispersion significantly exceeds public market active managers. This means selecting the right manager for private investments is critical. If you find a highly skilled manager you get great results. If you don\u2019t get a highly skilled manager\u2026you don\u2019t. <\/p>\n It isn\u2019t just about finding the right manager. It is being able to access the best managers in the first place. Private investors are selective about who they let invest. There are high minimum investments and some of the best private investors won\u2019t take money from retail clients. Some are closed to new investors. <\/p>\n If you want to invest in private assets, do it through a large industry super fund or the equivalent. The size of these asset pools means they have a seat at the table with the best private investors. That doesn\u2019t guarantee success, but it helps. What I avoid is the private investments being sold directly to retail investors. <\/p>\n Maybe I\u2019m being cynical, but I think returns skewed from the results of the top managers are being used to encourage people to invest with managers in the lowest quartile. If I was a top private manager, I wouldn\u2019t seek out an investor like me. It is far easier to go to an institutional investor and get one large check. <\/p>\n As Groucho Marx said, \u201cI\u2019d never belong to a club that would have me as a member.\u201d I\u2019ve put private investments in the \u2018I can\u2019t win here\u2019 category. <\/p>\n Final thoughts<\/p>\n Diversification is no different than every other part of investing. The approach you take should be based on what you are trying to accomplish and your personal circumstances. <\/p>\n Buffett and Hohn like concentrated portfolios. As highly skilled investors this allows them to tie their outcomes to the performance of their best ideas. I can appreciate the logic in their approach without replicating it. I don\u2019t have their skill and I\u2019m not comfortable with that level of concentration. <\/p>\n An area I can try and replicate is how selective they are about the investment opportunities they will consider. Focusing on a limited circle of competence makes sense for every investor \u2013 especially those that have less time to dedicate to research.<\/p>\n Within my circle of competence, I diversify away single security risk in my portfolio. I don\u2019t want the performance of one position to derail me from achieving my goal. I think this works best for me \u2013 I invest in companies that I understand while protecting myself from an unknown future.<\/p>\n Next time you hear the virtues of a particular asset class or type of investment ask yourself the following questions:<\/p>\n Does this investment help me achieve my goals? Is it solving a problem I face or a generic investing problem?Do I understand what I\u2019m investing in? This includes the design and structure of an investment product, the business model of a company, the factors that lead to success and failure, and the knowledge needed to evaluate good and bad opportunities. \u00a0Can I identify the right manager for my money? If I can identify the best managers, will they take my money? Is there a simpler and cheaper way to get a similar result?<\/p>\n There are many ways to be a successful investor. Find the one that works for you. <\/p>\n What won\u2019t you own? Share your view by emailing me at [email\u00a0protected]<\/a>.<\/p>\n Read more about Christopher Hohn<\/a><\/p>\n Three things you won\u2019t find in my portfolio<\/a><\/p>\n Get your finances on track with Invest Your Way<\/p>\n Our book Invest Your Way is available in 206 bookstores across Australia. Kindle and audiobook versions can also be purchased.<\/p>\n Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.<\/p>\n Purchase from Amazon<\/a><\/p>\n Purchase from Booktopia<\/a><\/p>\n Get Mark\u2019s insights in your inbox<\/a>Read more of Mark\u2019s articles<\/a>Read previous editions of Unconventional wisdom<\/a>What I\u2019ve been eating<\/p>\n The first evidence of pies are carvings in the tomb of Pharoh Ramses II who died in 1237 B.C. These original pies were stuffed with nuts, fruit and honey. <\/p>\n Czar Peter the Great liked to entertain his guests by having the court dwarfs jump out of giant pies at banquets. He was also known to force late arriving guests to drink 1.5 litres of vodka out of the Chalice of the Grand Eagle. Parties are more fun when thrown by an autocrat. <\/p>\n The first meat pies come from medieval Europe. The pastry was used to preserve the meat and discarded after cooking. These pies were known as coffins which is the origin of \u2018rat coffins\u2019 when pies came to Australia. Whatever you want to call them, the meat pie at Humble Bakery is a worthy version of this longstanding tradition. <\/p>\n![\"Pie\"](\"\/_ipx\/f_webp&q_50&blur_3&s_10x10\/https:\/\/cloudfront-us-east-1.images.arcpublishing.com\/morningstar\/UISHPE7PLVEBXOWMMZG3MPX2F4.jpg\")
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