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The Dangers of Being Focused

We love guru worship in the field of finance.  We’ll find someone who sounds smart, says all the right things, makes a few good calls and cling to their every word.  Until they fall on their face.  Then we find another guru to worship until the process repeats itself.  There is a revolving door of “gurus” in this field.

The problem with a lot of these “gurus” is that they’re focused.  They’re specialists in specific parts of the financial markets.  And since nothing works all the time in finance these gurus often go through long periods of looking brilliant and long periods of looking silly.  It doesn’t mean they’re not smart.  It just means they are, by definition, in the wrong place at the wrong time some of the time.

I bring this up as a relatively high profile bond fund shutters its doors.  The Third Avenue Focused Credit Fund will close on December 16th after a disastrous 18 month run that saw a 50%+ collapse.  This isn’t the only high profile fund decline in 2015.  Bill Ackman’s hedge fund has been whacked by Valeant exposure.  Eddie Lampert, the previous “Buffett successor” to Ackman, has been whacked by Sears, David Einhorn’s Greenlight Capital has been whacked by energy exposure.  Andy Hall, arguably the world’s greatest energy trader, is down 26% this year thanks to the commodity collapse.

What you’ll notice in all of these names is that they had highly focused exposure.  In other words, they weren’t very well diversified.  And so one thing is consistent across the rise and fall of market gurus.  If they’re not properly diversified they often live by concentrated risk and die by concentrated risk.  Given the dynamism of risk and the cyclical nature of the financial markets, this shows why it can be very dangerous to get too hung up on one guru’s ideas.