Investment Principles

Diversification is a Hedge Against Ignorance

Warren Buffett famously said, “Diversification is protection against ignorance.” He wasn’t dismissing diversification entirely, but rather highlighting that it often serves as a safeguard for investors who don’t fully understand the businesses they’re investing in. At Franny Amare, we don’t believe in relying on safety nets. Our philosophy is to avoid ignorance as best we can by deeply understanding the companies we own. We don’t need to own dozens of stocks because we prefer to be laser-focused on a few great businesses that we know inside and out.

Spreading capital across numerous companies might help reduce risk in theory, but it also dilutes the ability to fully capture the upside from the very best opportunities. Diversification can protect you from losses in one area, but it often leads to average results across the board, muting the impact of exceptional performance from any single investment. For us, concentration—not diversification—creates the conditions for extraordinary results.

By focusing on fewer companies, we can take the time to thoroughly evaluate their business models, leadership, competitive advantages, and long-term growth prospects. This allows us to invest with confidence, rather than relying on diversification to spread risk. We believe that when you truly understand the companies you own, you don’t need to hedge your bets. Instead, you can make meaningful, high-conviction investments that maximize the potential for outsized returns.

In essence, diversification is often used by those who want to avoid mistakes, but we view it as a strategy that prevents you from hitting home runs. Our goal is to not just avoid mistakes but to identify those rare opportunities that can transform our portfolio. By fully committing to a select few businesses, we position ourselves to capture the full upside when those companies succeed.

We Invest in Low Downside Risk, High Upside Potential

Our strategy centers on finding companies with low downside risk and high upside potential. This approach allows us to concentrate our investments in areas where we see the greatest opportunities for growth, without the need to spread our bets across numerous businesses just for the sake of diversification. When you deeply understand a business—its operations, its market dynamics, its leadership, and its competitive position—you can better measure the margin of safety, which in turn enables us to deploy capital more effectively, ensuring that the potential reward far outweighs the risk.

We don’t see the need to chase every opportunity. Instead, we focus on businesses that offer asymmetrical risk-reward profiles. The companies we invest in are those where the downside is limited by a strong balance sheet, durable competitive advantages, or long-term market trends that reduce the likelihood of significant loss. At the same time, we target companies where the upside potential is substantial, driven by innovation, scalability, or the ability to capture new market opportunities.

This disciplined focus on high-conviction investments allows us to navigate volatility without being overly concerned about short-term market fluctuations. Rather than spreading our capital thin across a wide range of companies to mitigate risk, we build a deep understanding of a select few businesses that we believe can weather downturns and capitalize on future growth. This enables us to make larger, more meaningful investments that have the potential to generate outsized returns over time.

Market Cap is the Lowest Common Denominator

For many investors, market capitalization has become the go-to metric when assessing a business. It’s a straightforward calculation—multiplying stock price by shares outstanding—and gives a snapshot of what the market thinks a company is worth at any given time. While it's a basic figure, it often becomes the one reliable metric to fall back on when making investment decisions. In situations where other indicators may be unclear or volatile, market cap provides a degree of confidence that a stock may be undervalued.

However, relying solely on market cap can obscure a company's deeper, more fundamental value. Market cap tells you how the business is perceived today, but it doesn’t reflect where the company is headed or its true long-term potential. At Franny Amare, we use market cap as a starting point, but we don’t stop there. We look beyond the surface to analyze what truly drives a company—its growth potential, operational strengths, and ability to generate consistent cash flows over time.

In moments of uncertainty, market cap can indeed serve as a solid fallback to gauge relative size and value, but we believe that the real opportunity lies in understanding what a business can produce in the future, not just what the market currently assigns as its worth. It’s about digging deeper into the fundamentals that drive value. By focusing on the long-term prospects of a company, we avoid the distractions of short-term market fluctuations and zero in on owning businesses that can grow and thrive over time.

While market cap can offer a useful snapshot, it’s just one part of a much larger picture. At Franny Amare, we believe that combining this metric with deeper analysis is the key to making investment decisions that stand the test of time.

You Must Be Able to Objectively Predict Future Cash Flows

At the end of the day, any investment comes down to one core question: Can you accurately predict future cash flows? This is the heart of understanding the value of a business. If we can’t forecast with confidence where a company is headed—we won’t invest. This is a fundamental principle at Franny Amare. We don’t rely on market sentiment or speculation. We base our decisions on a clear understanding of a business's long-term potential and its ability to generate reliable, sustainable cash flows over time.

When we find a company we believe in, we invest heavily. We commit a significant percentage of our total net worth because we don’t view our investments as mere stock picks—we see them as businesses we own. Our mindset is that of a business owner, not just an investor looking for a short-term gain. This ownership mentality drives everything we do. It pushes us to fully immerse ourselves in understanding the company’s operations, market conditions, and leadership so that we can add value as a partner, not just as a passive investor.

We don’t invest to diversify risk—we invest to capitalize on the best opportunities. When we commit, we do so with conviction, believing that the companies we invest in will thrive. This high-conviction approach allows us to focus our efforts, expertise, and capital on the businesses we believe have the greatest potential for long-term success. By investing heavily and thinking like owners, we align our goals with those of the businesses we invest in, creating a partnership that benefits both sides over the long haul.

Cash Is King

One of the key ways we reduce risk while maintaining a concentrated portfolio is by always holding a significant amount of cash. At Franny Amare, we believe cash isn’t just a safeguard—it’s a strategic asset. In times of market volatility or uncertainty, cash allows us to stay patient and avoid making rushed decisions. It gives us the flexibility to act quickly when opportunities arise, allowing us to deploy capital where we see the most potential, without having to sell existing positions at inopportune moments.

Holding cash also helps us manage the inherent risks of a concentrated portfolio. While we focus on owning a select few businesses that we deeply understand and believe in, cash acts as a buffer against unexpected market downturns or unforeseen events. This allows us to weather short-term fluctuations without being forced into unfavorable decisions. In essence, cash provides the runway we need to maintain our long-term perspective.

Additionally, cash enables us to take advantage of market dislocations. When great companies temporarily face undervaluation or when new opportunities arise, having cash on hand allows us to move decisively. In this way, cash isn’t just about protection—it’s about being ready to capitalize on the opportunities that others might miss.

In our strategy, we see cash as both a risk management tool and an opportunity enabler. It strengthens our ability to concentrate on the companies we believe in, while giving us the agility to seize new possibilities as they come.