Are Small(er) Teams the Secret to Long-Term Investment Success?

We are frequently asked when we anticipate growing our research team; the implication being that the size of our team is a disadvantage and that adding people would improve investment results. Our general attitude towards hiring a full-time analyst can best be described as extreme reluctance based on the following:

In 1984, Warren Buffett delivered a classic speech attacking the efficient market hypothesis at Columbia Business School called The Superinvestors of Graham-and-Doddsville. He describes a hypothetical national coin flipping contest where every citizen wagers a dollar on a daily coin flip with losers eliminated. After twenty rounds there would be 215 people that had successfully called twenty flips in a row and would have each accumulated over $1 million. He suggests that by this point the group would be writing books, appearing on television and hosting seminars explaining their coin flipping techniques. At which time a business school professor would point out that if the exercise were repeated with orangutans the outcome would be the same – “215 egotistical orangutans with 20 straight winning flips.”

However, Buffett argues that there is an important difference between the human and simian coin flippers. If 40 of the 215 winners after 20 days came from a particular zoo in Omaha, observers would be curious to learn from the zookeeper about the diet and training his orangutans receive. Buffett concludes, “if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.”

Buffett then proposes that origin does not have to be defined by geography. He proposes an intellectual origin and describes the intellectual village of Graham-and-Doddsville as students of acclaimed Columbia professors Ben Graham and David Dodd. He then proceeds to show the outstanding investment records of seven residents of Graham-and-Doddsville, each of whom, over a period of at least a decade, beat his benchmark by at least 700 basis points.

We think Buffett overlooked a second unusual characteristic of the Superinvestors – the size of their investment teams. All but two worked alone. The exceptions, Sequoia and Tweedy Browne, each operated a single fund run by a small team.

We know of very few outstanding investment results that have been produced by large teams and “small team” seems to be a common characteristic of Buffett’s Superinvestors.

Fred Brooks, an IBM software engineer, published The Mythical Man-Month: Essays on Software Engineering in 1982. In it he describes the myth that time and labour are interchangeable. Managers often assume that the time to complete a job that takes one person two months to complete can be halved by adding a second person. However, the reality depends on the divisibility of the task.....

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