Reworking by Jason Fried is one of the best books I’ve read in my early days. Jason has condensed his wisdom into starting and running a business into complex one-page chapters.
One of the interesting chapters in the book is about the idea of being a curator. In it, Jason writes:
You don’t make a big museum by putting all the art in the world in one room. This is a warehouse. What makes a museum fantastic is what it is no on the walls. Someone says no … There is an editing process. There are many more things switched off the walls that turned on The walls. The best is a subset of all possibilities.
A rereading of this chapter reminded me of Costco, one of the largest wholesale retailers in the world and one of the few that has shown remarkable resilience in an industry that has been under increasing pressure from online retail.
In fact, Charlie Munger has often suggested that Costco is his favorite company outside of Berkshire Hathaway and “one of the most admirable capitalist institutions in the world.”
Now, of all the reasons why Costco is so successful (membership model, low cost offerings, high quality management, great culture, etc.), one of the highlights in the context of this post is that Costco sells much smaller varieties of far fewer things than its peers. In other words, Costco can sell only three brands of ketchup compared to its competitors such as Walmart and Target, which can store twenty varieties and subvarieties of the product.
As an example, look at what a chocolate section is at Costco:
And here’s Walmart:
In a way, Costco is like a museum (compared to the fact that Walmart is a warehouse) that only stores the best-selling models, sizes, and colors of a limited number of products. This allows you to sell inventory quickly, limiting your circulating investment. Subsequently, even with a low profit margin, Costco generates an excessive return on equity (25%, compared to 17% for Walmart), a sign of a large retailer.
Someone early in Costco’s life must have said “no” to building another Walmart-like model, and that’s one of the most important reasons he’s done so well over the years.
“What matters is what you put aside,” Jason writes in Rework.
When you apply this crucial lesson to the creation of your stock portfolio, that means you are likely to succeed as an investor not only for the stocks you have, but more importantly for the ones you don’t have.
But we often end up building warehouses for our portfolios, not curated museums. One stock is followed by another, then another, two more, three more, and following, continuing, and continuing. Some people even hold several wallets, and each of them looks like a zoo of poorly controlled and poorly managed animals.
People buy stocks for all sorts of reasons: they like them, their neighbors like them, their friends make money, someone on Twitter screams about them, their prices have risen sharply in recent months, someone has recommended them on TV, someone wrote about them in online forums, someone brags about them in WhatsApp groups, and so on.
In the end, here’s what these wallets look like:
I read somewhere that we spend the first half of our lives adding things and the second half subtracting most of them.
Investing goes on in life, and that’s also what many investors end up doing. They create crowded portfolio stores in the early years of their investment career, realize that most of their options were mistakes, and then start to fall short.
In order not to lose the positive composition period, you will make a world of good by respecting and practicing this lesson: say no to most things, don’t add a lot of unwanted stock to your wallets – early.
In other words, be a stock curator, not a warehouse manager.
As a beginner, use the following checklist to begin the stock retention process. Run it in your existing portfolio to test which of your stocks you have left and which ones to subtract.
Bruce Lee got it right when he said:
It is not a daily increase but a daily decrease, eliminate what is not essential.
This is one of the most critical lessons I have learned and practiced in my life and as an investor. And this has helped me to simplify my life considerably and brought me enormous peace.
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