Academic journal article ABA Banking Journal

"Best" or "Balanced"?

Academic journal article ABA Banking Journal

"Best" or "Balanced"?

Article excerpt

WE GAVE A LOT OF "INK" TO Tom Brown this month. The founder and manager of Second Curve Capital, a financial services hedge fund, is a candid and keen observer of business practices, so we gave him the space to express his views, in "Activist investor" (p. 37).

That doesn't mean we're in total agreement with all his points, however.

Take, for example, the "myth of diversification." Brown cites Warren Buffet's statement that product and geographic diversification is "protection from ignorance"--i.e., protection from doing a poor job at what you already do. The great banks, says Brown, are niche focused.

"I'd rather find somebody who's really good at doing a few things," he says, "than have a very diversified conglomerate that's not good at anything."

It's hard to disagree with that statement, per se. The word "conglomerate," after all, conjures up images of Litton Industries and other patchwork companies that flopped. And yet, there is GE, which is a strong performer and very diversified.

One has to keep in mind that Brown is speaking as a fund manager. His investment strategy is to identify the creme de la creme. By definition, not all companies can be that. Is it possible to be "merely" creme, and yet keep most customers and investors satisfied? We think so, particularly if you're consistent at it.

Which brings us to balance. Not long ago we had a conversation with a mid-western bank CEO in which we talked about niche strategies. He responded that he didn't want to find a niche, or necessarily try to be the "best" at everything his bank does. Rather he tries to balance profitability, customer service, and technological prowess. This banker believes, further, that diversification is good--helping to balance, for example, the cyclical mortgage business. …

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