We at Cardinal are at the opposite end of the spectrum. Using a sporting analogy, we prefer to have the top players available in our starting line-up. That’s why we focus on our best, highest-quality ideas and maintain a select group of between 20 and 40 companies in our portfolios. Cardinal Rule No. 5 speaks directly to this belief – “Don’t overdiversify.”
Terry Wong, portfolio manager at Cardinal, says our investment philosophy revolves around high-quality companies that provide great value and pay out regular and growing dividends.
“There are a lot of great companies out there but not all of them make it in our portfolios due to our criteria,” he says. “Shopify, for example, has a great business, but as a potential investment, it doesn’t fit with our philosophy.”
“What we like about our concentrated portfolios is how thoroughly we can know our companies. We much prefer that to knowing hundreds of companies vaguely well,” he says.
Cardinal isn’t alone in our desire to have intimate knowledge of the companies under our watch. Legendary investor Warren Buffett has long said that diversification makes very little sense for people who know what they’re doing.
“Diversification is a protection against ignorance,” he says. “A lot of great fortunes in the world have been made by owing a single wonderful business. If you understand the business, you don’t need to own very many of them.”
Wong is often asked why Cardinal doesn’t own particular companies — usually the ones generating headlines. He prefers to own high-quality companies that go about their business quietly and meet our criteria. The in-depth research conducted prior to making each of our investments leads to higher conviction in our positions and historically has offered downside protection to clients during market turndowns. We refuse to water down the quality of our portfolios and continue to make this commitment to clients.
“We’ve done this for more than 30 years and that’s a big reason behind the excellent long-term performance of our portfolios,” he says.
