Hello Savio,

As always, thank you for taking the time to comment, and for reading The Enterprising Investor. I think your points about intellectual property are logical and flow naturally from your assumptions. So within that context they are tough to refute. However, just off the top of my head I can think of several other contexts in which your logic does not entirely hold. The first is to point out that intellectual property held in the form of patents is the property of the company. Patents do confer a continuous advantage. The second is that intellectual property is also contained in business plans and business models. That is, a better thought out plan or model trumps all others. Case in point: Uber is a superior business plan and model to that of any local taxi company. Whether Uber experiences turnover or not has little effect on this superior business. Next, execution of business plans and models is also a part of that ephemeral thing known as company culture. Company culture can persist even beyond individual employees or groups of employees and can even transcend time and place.

Last, and totally separately, high conviction is the denominator of the portfolio manager, not of the company in which an investor might place capital. What Tom is arguing here is that portfolio managers may examine thousands of companies and their securities, but that they only have a high degree of confidence in 10-30. That conviction may come from their deep understanding of the business, its model, its people, its executives, and/or its price. Unfortunately, the active management profession has evolved so that keeping a portfolio just to your high conviction names is a tough decision to make. First, there are the investment industry adjuncts that scream bloody murder that you would dare concentrate a portfolio, would possibly have style drift, would possibly have tracking error, and so on. Next, your fund company executives would be irritated if you turned away assets under management because scale is how asset managers get paid, rather than via returns. Yes, returns can grow AUM, but they are a lot harder than simply saying yes to new money that flows your way. I could go on, but I know that you understand the structure of the industry well.

Big smiles sent up north!

Jason