Bill Nygren (Trades, Portfolio) is a portfolio manager at the Oakmark Fund, the Oakmark Select Fund and the Oakmark Global Select Fund. In the past, he has been a speaker at the annual Ben Graham Conference. In his latest letter to investors covering the second quarter of 2019, Nygren hit on a concept that is worth exploring -- the idea that it is better to be a generalist than a specialist when it comes to investing.
This seemingly flies in the face of advice from other well-known value investors. Warren Buffett (Trades, Portfolio) is a famous proponent of the circle of competence -- the idea that you don’t have to have an opinion on every company out there, just a select few that you can focus on. Peter Lynch believed that amateur investors can develop an edge by focusing on the industries they have specialist knowledge of -- a mechanic should look at the auto sector, a doctor at pharmaceuticals, and so on.
So why does Nygren praise generalists? He believes that a wide knowledge base can allow an analyst to see things that a blinkered specialist may miss. The reason for this is investing is a "wicked" learning environment, as opposed to a "kind" one. The kind-wicked dichotomy was proposed by the psychologist Robin Hogarth to differentiate between environments with repetitive patterns and strong feedback (kind), and those with a high level of randomness and non-linearity (wicked).
Nygren believes that being a specialist allows you to choose among companies in a given industry, but it tells you nothing about how to compare companies among industries:
“Investing involves a search for solutions to complex problems—a 'wicked' environment not well suited to extreme specialization—yet in a typical investment firm, one analyst will be responsible for one industry. Let’s say an investment firm has an analyst assigned to the chemical industry. That individual will know a tremendous amount of detail about a dozen chemical companies. Rank ordering those 12 companies based on business quality is that individual’s forte. Knowing the expected news flow of the next six months is also an important part of that job.
But this individual is focused only on chemical companies. A question such as 'Is DuPont a better business than credit card issuer Capital One?' would probably be met with a blank stare. The more important question, 'Which is likely to be the better long-term investment?' is one an industry specialist is not trained to answer.”
Further, Nygren likes his analysts to be generalists because that allows them to critique each other’s ideas. Additionally, he believes that the generalist mindset is a better preparation for analysts who want to become portfolio managers.
So how to reconcile this point of view with that of Buffett and Lynch? The difference comes down to what is good for an individual investor versus what is good for a firm. Nygren obviously cares more about the performance of his fund as a whole rather than that of any one analyst. Therefore, it makes sense for him to train generalists who can help the firm prosper, even if that means individually they might not do as well as they could have if they had specialized in one area. But, for people who invest capital on their own, this may not work as well.
Disclosure: The author owns no stocks mentioned.
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