A Thoughtful Response to “Combining Core and Periphery Portfolio”

Dr. Phil Neches sits with me as a trustee of the California Institute of Technology and has been a long-time friend and adviser. He offers a response to my blog of March 28, 2011, titled, “Combining Core and Periphery.” The original blog post made references to markets, portfolios and classical music preferences.

Phil’s email is posted below.

Philip M. Neches received his BS, MS and PhD from Caltech.

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Mike,

One more thing about the periphery versus the core: the "next new thing" almost always comes from the periphery, not the core.

• Edison's movies versus Broadway
  
• Intel's microprocessors versus RCA's vacuum tubes
  
• Teradata versus IBM
  
• Charles Schwab versus Merrill Lynch
  
• First Solar versus Exxon?

If you want superior portfolio performance, particularly over the long haul, you have to identify and include "game changers" from the periphery. The earlier you identify and invest in them, the greater your differentiation from the herd.

Classical music was dominated by Romance language speakers through the Renaissance, but by German speakers from Bach through Brahms (roughly 1725 to 1875). For 150 years, classical music meant German music, and for much of that time, Vienna was the undisputed musical capital of the world.

But then music globalized. French, Russian, Czech, American, Scandinavian and English classical music blossomed. In our lifetimes, we saw that expansion reach Asia and South America. Vienna and German music still hold a key place in the classical music scene, but it has become much bigger, broader, more diverse -- and better.

The same thing is happening in business. Just as anyone who wants to excel at classical music must absorb the work and world view of the great Viennese composers, anyone who wants to excel in business must learn the language and values that we trace from Amsterdam to London to New York.

America will not totally dominate business in the 21st century as we did in the 20th. But ideas Made In America will, just as composers in Stockholm, Caracas, New York, and Beijing build on the heritage of Vienna.

--Phil
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