Microsoft (NASDAQ: MSFT) co-founder Bill Gates and famed investor Warren Buffett were once asked, separately, to write down a single word that accounted for their success.
Interestingly, both of them came up with the same word: focus.
When it comes to investing, there are few, if any, who can match Buffett’s track record.
Between 1965 and 2023, a period of almost 60 years, the Oracle of Omaha grew the market value of his company, Berkshire Hathaway (NYSE: BRK.A) by nearly 20 per cent per year, around twice the returns of the benchmark S&P 500 stock market index.
Paying attention to the right things is key. In an era of information overload, focus is more crucial than ever.
Focus on saying NO
Apple (NASDAQ: AAPL), the world’s most valuable company, owes its success to a handful of popular products, namely the iPhone, iPad, and Mac. The Cupertino company’s relentless focus on making the best products has propelled it to the top.
Here’s a surprise: it’s not only about deciding what to do.
Behind Apple’s success is a rigorous process of eliminating hundreds of promising ideas to hone in on a select few. In fact, its late co-founder Steve Jobs said that he was as proud of the things he didn’t do as those that he did do.
In effect, you have to learn to say no to hundreds of good ideas to whittle down what you wish to focus on.
Buffett does the same thing.
On his table, the Oracle of Omaha keeps a tray labelled, in capital letters, TOO HARD, a strategically placed reminder that most of the opportunities which cross his desk belong in that tray.
Now pause and think about the arrangement above for a moment.
Buffett is widely lauded for his investment smarts and long investing experience. In other words, it would be ridiculous to suggest that he has trouble understanding any company.
But Buffett knows better than that.
Despite his ability, the Oracle of Omaha is smart enough to know that there are many companies out there that he does not understand and should not touch.
We’ll be wise to do the same.
When to say YES
So, what should investors focus on?
The good place to start is the leaders behind the company.
Here’s a hint: when it comes to hiring people, Buffett said that there are three qualities you should look for, namely integrity, intelligence, and energy.
Interestingly, he also added that if you don’t have the first attribute, the other two will kill you.
Indeed, when you examine a business, the management team’s integrity is among the first few things you should focus on. After all, you don’t want to be constantly looking over their shoulder to see if they are doing the right thing.
You want leaders who are candid and tell it like it is.
Here’s an important point investors miss: honesty comes at a price. It’s not only about hearing good things about the company from the leadership. It’s also about the willingness to take in the bad news and at times, the downright ugly news.
Take Meta Platforms (NASDAQ: META) for instance.
Back in early 2022, Meta CEO Mark Zuckerberg singled out TikTok as one of the most formidable opponents it has ever faced. On top of that, he went into great detail about other challenges including Apple’s new privacy framework which limited its access to user data.
Many in the financial media saw his admission as a sign of weakness.
Yet, as an investor, you have to be willing to endure the naysayers to get to the bottom of the situation. In this case, having details is an enabler, and not a source of pain.
Think about it: the alternative is worse, a CEO who lives in denial of potential threats.
Here’s the key point: acknowledging a threat is not the same as surrendering. More importantly, Zuckerberg also had a plan to combat the challenges that the company was facing.
Say YES to cash
There’s an unfortunate adage in news broadcasting: if it bleeds, it leads.
Said another way, negative headlines tend to get almost all of the attention while positive news gets buried in the process.
It’s true in investing as well.
When Facebook reported a loss of a million daily active users (DAUs) in early 2022, the reaction from news outlets and analysts were deafening, with some even suggesting Facebook is on its last legs as a social network.
Here’s the truth: since reporting the loss, the social network has gained over 180 million DAUs by 2023.
But do you hear about these positive gains in the media? No, you don’t.
This example tells you one thing: you have to be proactive in searching for positive trends within the company. And that means looking past its current problems and honing in on the parts which are not said out loud.
For instance, at the end of 2021, Meta was far from a dying business.
In fact, the social media company had nearly US$48 billion on its balance sheet after generating US$39 billion in free cash flow during the year.
The financial firepower at its disposal enabled the company to invest in building new initiatives such as Reels (a short-form video format), Click-to-Message ads (a new ad product) and Advantage+ (an AI-powered marketing campaign product).
To top it off, all three products above have become significant topline growth drivers for Meta, with each of them reaching over US$10 billion in revenue run rate by the end of last year.
As a result, Meta has generated US$49 billion in free cash flow over the past 12 months and has grown its cash pile to over US$58 billion at the end of June this year.
In turn, the company’s shares have reacted positively, increasing by over 480 per cent since its 2022 lows.
Get Smart: The right combination of focus
The experience above tells you two things.
One, you should always pay attention to whether the management has a plan, and two, whether the team has enough financial firepower to pull it off.
The rest is about making sure the leadership follows through on what it said it will do.
To be sure, it’s not to say that focusing on these things alone will guarantee you a good result. Every business has its blend of idiosyncrasies, and the focus areas may differ from company to company within an industry.
Finding the right combination of positives in a business is the key.
Above all, don’t forget to discard the businesses which are too hard to understand. If Buffett can do it, so can you.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Apple, Berkshire Hathaway, Meta Platforms, and Microsoft.
