Q: I have a different approach to investing. I value each company and invest only in those trading way below their intrinsic value and have certain characteristics, such as low debt, predictability, constant or growing margins, etc. What’s your view on having a concentrated portfolio of value companies you’ve analyzed and selected as likely to have better than average returns over a value index fund?
A: All the evidence I know suggests that the small cap value index is built for the best long-term returns. Your approach suggests that selecting the best value companies will turn in the best returns. The academics have not been able to find any approach to preselect the value stocks that will outperform other value stocks. Their answer is to own them all. The premium for taking that broadly diversified approach is huge, so why try to pick the best and fail, which you are likely to do?