It was easily 30 years ago … probably longer. I was sitting in a client’s house in Exeter, New Hampshire. My client was a man in his late sixties who had been an M.I.T. graduate. As such, he had an elevated level of self-confidence. I handed him a sheet of his holdings which showed profit and losses. It had been a difficult time in the stock market and many of his holdings were in the red; few were green. Without saying anything, he studied the sheet and then said, “I want you to put a stop order 10% under all the stocks in the portfolio.” “I won’t do that,” I responded. “Yes, you will,” he said very firmly. Shaking my head, no, I stood up offered my hand and proceeded to leave. We had fired each other.

As I was outside, about to get into my car, I heard a flock of geese “honking” overhead. Looking up, they were in their classic V formation. Ironic, I thought; it was why I had to fire the client or had he fired me? One thing I did know was, I needed all the stocks in the portfolio to stay intact to get the best performance. The reason? While I “loved” them all, I had no idea which one or ones would drive the performance. It turns out, this has also been Warren Buffett’s experience. Recently he said, “We have just one good idea every five years.” Stop orders could preclude a future Walmart.

Understandably, most clients want all their stocks to go up. But I had learned years before it is not how often one is right, but the magnitude of when you are right that drives performance. Stocks are like birds sitting on a telephone line. Suddenly they take off, but there is no way of knowing in advance which one, or ones, will lead the flock. This bird flight formation became my personal stock market metaphor in 1978 after I had bought Toys R Us. It had emerged from a bankruptcy court with the judge giving control of the company back to the original entrepreneur, Charlie Lazarus, who had sold the business years earlier. A 50% gain was my hope. It went up 40x! Who would have expected that?

The experience taught me, it’s not the number of times one is right - but the magnitude of when you are right – that determines a portfolio’s success. It was a concept my New Hampshire client had not grasped or, retrospectively, perhaps I had failed to communicate well. To me it was basic. No one could guess which bird would lead the flock. But in investing, you can choose and limit the size of your “flock.” A small number will have a greater impact if they’re well chosen. It’s known as a concentrated portfolio. One of the most famous examples of it was Bill Miller who managed the Value Trust fund.

Miller achieved fame by beating the S&P 500 for 15 consecutive years from 1990 to 2005. No one before – or since – has ever done that. As you know, I believe that the level of interest rates – and their length of time - have a profound impact on an active manager’s success. It’s the secret. A consistent level of normal interest rates results in dissipating correlations thus creating dispersion among stocks. Bill Miller was very good at picking stocks. Moreover, correlation in his 15-year time frame was well below the historic average of 26%. It’s called being in the right place at the right time.

When Miller was at his peak, I also worked at Legg Mason. He had godlike stature in the firm. At one point, he had just 10 stocks accounting for over half of his portfolio. That’s a small “flock!” By 2004 at the peak of his fame, I received a phone call from a friend canceling a planned dinner. My friend told me Miller had invited him to a party on his new 212’ yacht called Utopia in Baltimore harbor. My immediate thought was, Sophocles was right, “Those whom the Gods would destroy…” The 15-year streak ended in 2005. Fed funds had declined from 8.3% 15 years earlier to 2.3%. The streak was over.