The benefits of in-house research

We have previously referred to the performance record of the late Bill Ruane (1925 - 2005) of the Sequoia Fund, which he managed along with Rick Cunniff and Bob Goldfarb for many years.

In a letter to shareholders that Mr. Ruane wrote in February, 1997, he makes a point that we believe is very important and a point which is still not widely appreciated in the investment world today. There, Mr. Ruane said:

In a memo written in 1969, we stated that we wanted to do only one thing -- strive for excellence in money management by having the principals concentrate on security analysis and use the results of their own research, as opposed to using outside research, to manage portfolios themselves rather than separate the task between the "research department" and the "portfolio managers." Rick Cunniff and I had been doing research and investing in this fashion for over fifteen years at that time.

This approach is still unusual on Wall Street, some 28 years later. Typically, people start out their careers in an "analyst" function but aspire to get promoted to the more prestigious "portfolio manager" designation which is considered to be a distinct and higher function. To the contrary, we have always believed that if you are truly a long term investor, the analyst function is paramount and portfolio management follows naturally. While we don't go in much for titles at our firm, if we did, my business card would read "Bill Ruane, Research Analyst".

[Sequoia Fund N30D for 12/31/1996, filed on 02/28/1997, SEC filing 811-01976. Italics in the original.]
We believe this emphasis on doing their own research, rather than relying on the research of others, was a key ingredient in their success, and it is a conviction we share as well. The benefits of doing in-house research rather than relying on outsourced research include a greater understanding of the business and the financials of the companies in which one invests, a better understanding of the management team and business strategy, and in general a more personal understanding of the factors which contribute to the crucial decisions of whether to invest, when to invest, and when it is time to sell.

This is not to denigrate the many excellent research firms that provide external research, (many of them completely outside of Wall Street) or to say that others' opinions are never valuable to consult, but rather to say that we believe the primary research should always be personal, and the expert opinions of others can be consulted as supplementary to that.

If you think of the great generals and tactical commanders of history, such as Patton or Rommel or Napoleon, you will find a common conviction among all of them that they needed to see and analyze the terrain themselves. This is not to say that they would not value the insights of their engineers, artillery officers, and other experts who might have conducted additional analysis or reports, but rather that these legendary tacticians would conduct personal analysis themselves, and layer the reports of others onto the understanding which they gained through their own observation and experience.

This is an important point for investors to understand.

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