Borehole Investing

• The Bottom Line: Borehole investing is a high-conviction strategy where you concentrate your capital into a small number of deeply researched, exceptional businesses that you understand intimately.
• Key Takeaways:
• What it is: An approach, famously championed by Charlie Munger, that favors owning a few “great” companies instead of a basket of many “good” ones.
• Why it matters: It forces discipline, deep analysis, and patience, aligning perfectly with the core tenets of value investing. When successful, it can generate returns that significantly outperform the broader market. See concentration.
• How to use it: By operating strictly within your circle_of_competence, conducting exhaustive research to identify wonderful businesses, and then waiting for an attractive price before investing a meaningful portion of your capital.

Imagine you're a wildcatter searching for oil. You have two options. Option A is to take a shovel and dig a hundred shallow holes all over a vast field. Each hole is only a few feet deep. You might find a little bit of crude here and there, but you'll never hit a gusher. Your efforts are spread too thin, your knowledge of any single spot is superficial, and your results will likely be mediocre. This is the investing equivalent of owning a tiny piece of hundreds of different stocks, a practice value investors often call “diworsification”. Option B is to spend months studying geological maps, analyzing soil samples, and using every tool at your disposal to identify the single most promising spot in the entire field. Once you've found it, you bring in a massive drilling rig and drill one deep, focused borehole, thousands of feet into the earth. It's a riskier, more concentrated bet. But if your research is sound, you don't just find oil—you strike a massive, wealth-generating reserve. Borehole investing is Option B. It's an investment philosophy that rejects the idea that safety comes from owning a little bit of everything. Instead, it argues that true safety comes from knowledge. A borehole investor aims to know a handful of businesses better than almost anyone else on Wall Street. They study a company's history, its products, its management, its competitors, and its financial health with forensic intensity. This deep knowledge gives them the conviction to make large, concentrated investments when an opportunity arises—typically when the market panics and sells off a wonderful business for a foolishly low price. Instead of putting 1% of their portfolio into a stock, they might put 15% or 20%. They are betting big, but they are betting on a race they believe is heavily rigged in their favor due to their superior research.

“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.” - Charlie Munger

This approach isn't about trading stocks; it's about owning businesses. A borehole is a long-term project, and so is a borehole investment. The goal is to find a wonderful company and stay with it for years, or even decades, allowing the power of compounding to work its magic.

For a true value investor, the borehole approach isn't just a strategy; it's the logical endpoint of the entire philosophy. It intertwines with every core principle taught by Benjamin Graham, Warren Buffett, and Charlie Munger.

• It Enforces the Circle of Competence: You cannot drill a deep, effective borehole in geological terrain you don't understand. Similarly, you cannot conduct the necessary level of deep research on a business or industry you don't truly comprehend. This strategy forces an investor to be brutally honest about what they know and what they don't. It's the ultimate defense against venturing into speculative areas where others have an edge.
• It Demands Genuine Due Diligence: It's impossible to “fake” borehole investing. The level of conviction required to allocate a large slice of your net worth to a single company can only come from exhaustive, painstaking research. This means reading a decade's worth of annual reports, understanding the company's economic_moat, assessing the integrity and skill of its management, and calculating a conservative estimate of its intrinsic_value.
• It Maximizes the Reward from Patience: Value investing is often a waiting game. You wait for a great business, and then you wait for a great price. The borehole approach ensures that when that rare opportunity—the “fat pitch” Buffett talks about—finally arrives, you can capitalize on it in a meaningful way. A 20% gain on a 1% position is nice; a 20% gain on a 15% position is life-changing. It rewards your patience handsomely.
• It is the Antidote to “Diworsification”: Many investors mistakenly believe that owning more stocks automatically reduces risk. A value investor understands that risk comes from not knowing what you're doing. Owning 100 stocks you barely understand is far riskier than owning 5 businesses you know inside and out. The borehole strategy embraces concentration as a tool for reducing risk, assuming the homework has been done.
• It Strengthens Your Margin of Safety: Because your research is so deep, your estimate of a company's intrinsic value is likely to be more reliable. This allows you to apply a margin of safety with greater confidence. When you buy a deeply understood business for 60 cents on the dollar, your risk of permanent capital loss is extremely low, even if the bet is a large one.

Applying the borehole strategy is not a simple checklist; it's a disciplined, multi-stage process that can take months or even years for a single investment.

1. 1. Define Your Geology (Identify Your Circle of Competence): Before you even think about drilling, you must know your terrain. What industries do you understand because of your profession, hobbies, or dedicated study? Are you a doctor who understands healthcare? A software engineer who understands technology trends? A banker who understands financial statements? Write down 3-5 industries where you have a genuine, sustainable knowledge advantage. This is your hunting ground.
2. 2. Prospecting (Idea Generation): Start looking for potential drilling sites within your circle.
   • Read trade publications for your chosen industries.
   • Look for companies with consistent, high returns on capital.
   • Screen for businesses with little to no debt.
   • Study the holdings of other value investors you admire.
   • The goal is to create a watchlist of 10-15 potentially wonderful businesses.
3. 3. The Seismic Survey (Exhaustive Due Diligence): This is the heart of the process. For each company on your watchlist, you must go deeper than 99% of other investors.
   • Read the Primary Sources: Read the last 10 years of annual reports (10-Ks)¹⁾ and quarterly reports (10-Qs). Listen to a dozen past earnings calls.
   • Understand the Business Model: How does it make money? Who are its customers? What gives it a durable competitive advantage (its economic_moat)?
   • Analyze the Financials: Is revenue growing? Are profit margins stable or expanding? How much debt does it carry? Does it generate strong free cash flow?
   • Assess Management: Are they honest and transparent? Do they think like owners? How is their compensation structured? Do they have a history of smart capital allocation?
   • Evaluate the Valuation: Based on your analysis, what is a conservative estimate of the company's intrinsic_value per share?
4. 4. Waiting for the Right Price (Patience and Mr. Market): After your deep research, you might conclude that “Wonderful Widget Co.” is a fantastic business worth $100 per share. But today, it's trading at $120. You do not buy. Your job now is to wait. You wait for a market panic, an industry-wide selloff, or a temporary, solvable company-specific problem to create your opportunity. You need mr_market in one of his depressive moods to offer you the business at a significant discount—say, $60 per share, providing a 40% margin_of_safety.
5. 5. Drilling the Borehole (Making a Concentrated Bet): When the price is right, you must act with conviction. This is not the time for a small, “toe-in-the-water” position. A borehole investment should be significant enough to have a real impact on your portfolio's performance. Depending on your risk tolerance, this could be anywhere from 5% to 25% of your investable assets.
6. 6. Monitoring the Well (Long-Term Ownership): The work isn't over. You must now monitor your investment, not by watching the daily stock price, but by following the underlying business. Read each new quarterly and annual report. Is the company's competitive advantage still intact? Is management still making rational decisions? As long as the business thesis remains sound, your default action is to do nothing and let the investment compound.

Let's compare two investors, “Diversified Dan” and “Concentrated Carla”, over a five-year period. Both start with a $100,000 portfolio. Dan believes in wide diversification. He buys an S&P 500 ETF, giving him ownership in 500 of America's largest companies. His knowledge of any single company is minimal. He is guaranteed to get the market's average return, minus a small fee. Carla is an avid home cook and has spent years studying the consumer staples industry. Her circle_of_competence is food and beverage companies. She spends six months conducting a “borehole” analysis on “Artisan Coffee Collective” (ACC), a company with a powerful brand, loyal customers, and a growing global presence.

At the time of her analysis, ACC is trading at $190 per share. It's a great business, but not a great price. Carla does nothing. She waits. A year later, a media report creates a health scare about coffee consumption. Panic ensues. Wall Street analysts downgrade the entire sector. The stock of ACC plummets to $110 per share. Dan's S&P 500 ETF dips slightly. He barely notices. Carla, however, re-reads her research. She knows the health scare is overblown and has no bearing on ACC's long-term business fundamentals. She sees a wonderful business trading at a 45% discount to its intrinsic value—a massive margin_of_safety. She acts decisively, investing $25,000 (25% of her portfolio) into ACC stock at $110. Over the next four years:

• The health scare fades.
• ACC continues to grow its earnings and expand into new markets.
• The market recognizes its mistake and the stock price appreciates to $250 per share.

The Result: Dan's ETF achieved the market average, let's say a 10% annual return. His portfolio is now worth roughly $161,000. A solid, but not spectacular, outcome. Carla's portfolio saw a massive boost from her single, high-conviction bet. Her $25,000 investment is now worth over $56,800. This single “borehole” dramatically accelerated her wealth creation, leading her portfolio to be worth significantly more than Dan's. Her deep knowledge allowed her to turn market fear into financial opportunity.

• Potential for Extraordinary Returns: By concentrating on your best ideas, you can dramatically outperform market averages over the long term. A few great decisions can have a transformative effect on your wealth.
• Fosters Deep Expertise: This approach forces you to become a true business analyst, not just a stock quote watcher. The knowledge you gain is a durable asset in itself.
• Reduces Frictional Costs: Fewer decisions mean fewer trades. This leads to lower commissions and, more importantly, a deferral of capital gains taxes, which allows your capital to compound more efficiently.
• Clarity and Focus: It's far easier to closely monitor the business fundamentals of 5 to 10 companies than it is to keep track of 50 or 100.

• Magnified Risk of Error: The flip side of high concentration is high risk. If your in-depth analysis is wrong on one of your major holdings, it can cause severe and lasting damage to your portfolio. This strategy is unforgiving of mistakes.
• Higher Volatility: A concentrated portfolio will almost certainly be more volatile than the overall market. You must have the psychological fortitude to watch a large part of your net worth fluctuate significantly without panicking.
• The Temptation of Overconfidence: After a successful borehole investment, it's easy to become overconfident and believe your analysis is infallible. This can lead to sloppy research on the next idea, which can be disastrous.
• Long Periods of Inactivity: The borehole approach requires immense patience. There can be years where no great businesses are available at attractive prices. The psychological pressure to “do something” can lead investors to lower their standards and make suboptimal decisions.

• circle_of_competence
• concentration
• diversification
• margin_of_safety
• intrinsic_value
• due_diligence
• economic_moat