Authored by Rahul Setty
Ask 20 people you know what a portfolio is, and each one is likely to give you a different answer ranging from something that wealthy people have (perhaps partially true) to where stocks are traded (not quite!).
In my mind, the clear and obvious answer is that an investment portfolio is a business of owning businesses. This is an endeavor that is not focused on speculation, but on compiling a collection of high-quality, durable businesses that are likely to produce a strong stream of cash flows in the long run, thus providing outsized returns for their owners. By performing holistic work on a set of businesses, evaluating which are qualitatively and quantitatively attractive, and investing for the long run to lengthen their time horizon (the only time horizon on which business can fully develop), investment managers are more likely to produce alpha.
Ultimately, the investor's job is to (1) meet or exceed their hurdle rate to meet their investment objectives, which should be higher than that of the market's return if actively investing and (2) achieve this outperformance in a replicable, process-oriented way that does not result in permanent capital loss. The way to do this is to diversify among one's bets, owning a multitude of companies over the long run and analyzing companies for the purpose of understanding how much cash flow can be produced, how much capital is required to generate these returns, and how much cash flow can be returned to owners.
