On Baskets vs. Single Names

A comparison of idea implementation

There are funny stories that get told and retold about legendary trades and investors. It’s worth re-stating that, as this newsletter mentions frequently, circumstances always define everything— everything is always n=1, this time is always different, pattern recognition and analogies are never one-to-one, and one is always working off imperfect information. That being said, it is worth looking at what the greats have done in markets, relatively recently, particularly with equities. Druckenmiller has that famous quote on equities. Bastardized, it’s something like 90% is sector/factor/beta, 10% of the move is idiosyncratic.

In a fairly recent interview (maybe 2024?) he once talked about how he just asked an LLM “for the most liquid ADRs in Argentina” when he liked the new policymaking regime in Argentina. Then he just bought the basket. When Buffett bought his basket of airlines pre-COVID, he bought every single US carrier, without favoring any single one of them, but consciously staying under 10% as to not trigger the short swing profit rule. This is the key feature it seems of the basket advantage that is sort of tautological— of course there is more liquidity. Liquidity is helpful on both entry and exit. Liquidity attracts MORE liquidity. Idea velocity in liquid instruments accelerates as a function of price. That is a smart-sounding way of saying “the more liquid your trade, the quicker the market decides if you’re right or wrong”. It’s probably the key selling point of putting on a basket trade. Look at Leopold’s book— it was essentially two home-run basket trades, just levered a bit too much. That whole episode shows just how powerful on the upside and downside you can get with basket trades: hugely idiosyncratic baskets can trade -30% in calm markets. Said another way— you get the juice when trading these baskets while maintaining liquidity. Maybe not as much as single names, but you get the point.

**Another tautology— a pop-culture-acronym basket, something like FANG, doesn’t necessarily make a basket, but it can after enough positive reinforcement and reflexivity. The original Facebook, Amazon, Netflix, and Google had very different business models. Even Facebook/Google, which could be classed as “digital ads” could be bifurcated as “social media vs. search”. So business model correlation can be overridden by market sentiment at times.

The post is timely because I like a few basket trades, but I hate pretending like I’m an expert in any of these individual businesses. I don’t know which TV station management will do the best in the political cycle. I don’t know which American coal companies have the best cost curve. I don’t exactly know which former blue-chip software businesses will actually be fine in the world of AI. But I know enough to know they’re hated and being bought together shields me from too much in the way of idiosyncratic bombshells. This is essentially how I group my watchlist— European defense, coal/PGMs, busted consumer names, busted SAAS names, TV stations, non-MAG7 MAG7 (things like Tencent).

The downsides of the basket vs. the single name are sort of obvious. You’re never gonna capture the maximum upside long-term. One-hundred baggers generally don’t come in basket form. You also eschew any activism where you’re going to be able to effect change at the company management level. Your positions are naturally smaller so you don’t get the Bezos-style “1,000,000 to 1 payout” for a given company’s product launch or special circumstances. At sort of an ontological level, the basket is antithetical to any business that seeks to be differentiated. You’re saying “actually the product doesn’t matter, you’re a slave to the industry dynamics regardless”. Which is spiritually misaligned with alpha-stockpicking. But nonetheless, lately, I find myself more attracted to these basket-type trades. At the end of the day it’s just about being more ambivalent about how you make your money, rather than focusing 100% of time on finding 100-baggers.

This quest, for the alpha-stockpicker, is rooted in a belief in human agency—that a great CEO matters, that a great product matters. The basket trade is an admission that, most of the time, the tide matters more than the boat. It is an acknowledgment that we are operating in complex systems where exogenous factors (liquidity, policy, reflexivity) regularly overwhelm endogenous drivers (earnings, product-market fit, management). Commodities guys like Goerhing and Rozencjwag get this. By treating it purely as a proxy for an industry or factor or commodity price, we are not admitting defeat. Rather, we are optimizing for the variables where we actually have an edge. We may not have an edge in predicting which busted SAAS company will survive, but we may have an edge in recognizing a group of them, trading at a historic valuation disconnect relative to forward growth, deserve the benefit of the doubt and may benefit from an “AI helps, not hurts” narrative shift.

Ultimately, the goal of investing is not to be ideologically pure, the goal is to make money. A portfolio comprised entirely of single-name, high-conviction moonshots can be a recipe for catastrophic idiosyncratic risk, while indexing is admitting defeat (not to mention the current state index constituents). The basket trade sits in that sweet spot.