Startup Buffettology Lesson #4: Less Is More

** Really successful people say no to almost everything.

** Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.

** If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.

** Opportunities come infrequently. When it rains gold, put out the buck, not the thimble.

** Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.

** Our favourite holding period is forever.

** Lethargy bordering on sloth remains the cornerstone of our investment style.

** The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!’, ignore them.

— Warren Buffett

This is lesson #4 in our “Startup Buffettology” series.

The quotes above are probably clear enough to most entrepreneurs but the final quote about the “sweet spot” deserves some clarification (at least for non-Americans). Buffett is using a baseball analogy derived from “The Science of Hitting” in which Ted Williams, a highly successful baseball player, explains how his success was based on the discipline of only swinging at balls that were thrown into his comfort zone i.e. doing less.

What does it all mean? When you’ve found that surefire winner, you don’t behave like Lot’s wife — you go all in. If you are uncomfortable about dropping everything else, or you don’t see this as something you could keep working on for the next decade, or you aren’t ready to sacrifice all your other “good ideas” for this one, then it’s probably not The Big One for you.

If following Rule #1 has clarified your core, applying Rule #2 has helped you build a robust mental map of your industry, and adhering to Rule #3 has driven you to do enough low-risk experimentation to identify that perfect opportunity, then it’s time to swing for the fences. You need to divest yourself of non-essentials and focus. You need to go all in.

All these are basically aspects and implications of the Pareto Principle. A quick look at Buffett’s (i.e. Berkshire Hathaway’s) investments in publicly-traded stocks as at 28/3/2017 indicates that:

  • Berkshire Hathaway owns shares in 45 publicly-traded companies;
  • The investments are valued at $162,931,114,543 in total;
  • The top 20% (i.e. top 9 shareholdings by market value) account for $132,320,306,899;
  • And this is equivalent to (drum roll, please) 81.2% of the value of this portfolio.

Enough said.

Peter Thiel affords this concept some attention in “Zero To One”, wherein he states that “we don’t live in a normal world; we live under a power law”. Thiel discusses what this means for an entrepreneur — you may be running around being “busy” and doing many things, but in general there is only one best use of your time, one best marketing channel, one best product, etc…and this One Thing contributes in a massively disproportionate way to your overall success.

Therefore it behoves the entrepreneur to spend quality time finding that One Thing personally (use of time and energy) and for the business as a whole (process, product, channel, customer, etc), and then focusing like a laser beam accordingly. The One Metric That Matters (OMTM), popularised by Croll & Yoskovitz in “Lean Analytics”, is a useful notion for applying this to a startup or early-stage business.

Concepts like OMTM are useful for the business but in addition the entrepreneur needs tools to develop a “Personal OMTM” framework because if there isn’t some basic amount of personal discipline, no amount of business tools will work. As discussed under Rule #1, the highest priority things would relate to your core skills or talents. In addition your core interests should be aligned with your core values to identify the “sweet spot”. In “The AllianceReid Hoffman describes a “value identification” heuristic that is simple and quick enough — it boils down to using the top 3 values from your top 3 role models to generate a list of 9 values which you then prioritise.

The upshot of ruthlessly cutting out non-essentials is that one will generally end up getting bigger results while spending less time, and the time saved can be reinvested in learning — as in Rule #1 — creating a positive feedback loop.