1. Cash and liquidity in part is fine. An investment broker will often tell you that you need to be fully invested in the stock market, and that this is particularly true if you are younger and have a longer period of time until retirement. In contrast, Warren Buffet articulates that a good degree of liquidity is critical. In short, there is nothing wrong with having a certain percentage of your assets in cash and not invested in the stock market.
2. Wait for the right pitch. When investing, whether looking at surgery centers or investment opportunities, the idea is not to swing at every pitch. Rather, wait till you have an opportunity that you believe with a good deal of certainty is a good bet. I recall my first surgery center investment; there, I was so excited to have the opportunity to be asked to invest that I promptly did so. This was despite the fact the center did not have enough cases and, on top of this problem, was located in a very poor reimbursement market. Thus, I showed tremendous brilliance by investing in a center with both too few cases and poor reimbursement. I promptly lost all the money I’d invested. Since that point, I have better recognized the wisdom of this concept. Unfortunately, one of the challenges that we all face is that we are not constantly looking for investment opportunities, and thus do not have the chance to look at so many pitches that one can comfortably sit on the sidelines and wait for the “fat” pitch. However, this is clearly the right notion. Further, as one gains experience investing in stocks or in surgery centers, or in other healthcare businesses, one can gain a better and better understanding of what actually is the “fat” pitch.
3. Don’t over-diversify. One of the mantras that is spoken is that of diversification. One of my closet colleagues, an investment manager at the famous Oak Mark Funds, Bob Burnstine, long ago said to me that you are far better off having three to four core investments (in this case a few mutual funds) than 15 different mutual funds or for that matter 50 to 60 different stocks. In essence, you are far better off having 10 to 15 high quality investments than 30 to 40 which are harder to manage, harder to watch and harder to pay close attention to. Further, it is almost impossible to closely follow more than a certain number of investments.
4. Protective moats. It is corollary to the concept of waiting for the fat pitch, another Warren Buffet investment rule is to attempt to invest in something that has a significant moat around it. This means that it has some sort of protective barrier to entry that makes it hard to run or compete with. In business, this may be a brand such as Coca-Cola, or a huge reinsurance entity that has so much capital that it is hard to compete with. In surgery centers, this may be a center built around the 800-pound-gorilla hospital in the town, the core orthopedic group in the town, or built with certificate of need protection. In any event, the concept is to look to investments where there is some protection that is likely to give a certain amount of protection to the investment over time. Try to understand what the built-in edge of a company is and evaluate whether that edge is significant enough to invest for the longer term.
5. Invest in projects and companies for the longer run. While one needs to periodically evaluate whether a company is significantly overvalued or not, the core concept is to look for 10 to 15 great investments and to invest in them for the long run. In essence, do not look to be an in-and-out trader.
6. Stick to your area of competence. It is very difficult to be a master of too many disciplines. For example, one might be an expert company in selling or developing medical equipment, such as Alpine Surgical Equipment or BBraun. In contrast, those same companies might not do a terrific job of managing surgery centers or in building or constructing surgery centers or hospitals. The same concept holds true for investment. One may become a fairly good investor in a certain type of company, banks or financial institutions, or an area such as real estate or healthcare. However, it is almost impossible to be terrific investor in all areas. In essence, one of the concepts is to learn a great deal about a few fields and allocate most of your investment dollars and time to those few areas.
We find the writings of and about people like Peter Drucker and Warren Buffet to be very educational and informative. We hope that you find some of these core concepts set forth here of interest.
— Scott Becker is co-chairman, McGuireWoods Healthcare Department, and publisher, Becker’s ASC Review. Contact him at sbecker@mcguirewoods.com.
