Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191)

Micro Cap Origins

Brian Bares, founder of Bares Capital Management, reflects on the firm's origins in the microcap space, highlighting the strategic choice to focus on concentrated portfolios. He explains that the decision to concentrate was driven by the inefficiencies he observed in overly diversified portfolios, which often charged active fees for passive results 1. Bares shares his journey from starting the firm in a spare bedroom with minimal resources to negotiating institutional contracts himself, emphasizing the importance of frugality and focus in the early days 2.

I didn't want to be in the 40 act fund business because it's a regulatory nightmare. It's very high fixed costs.

--- Brian Bares

This approach allowed Bares Capital to stand out in a crowded market by offering a unique value proposition to institutional investors.

   

Strategic Diversification

Bares Capital's strategic diversification across market capitalizations has been pivotal in reducing operational risks and enhancing stability 3. Brian Bares argues that having multiple strategies not only benefits the firm but also its investors by providing a robust infrastructure and reducing existential risks 4. He emphasizes the importance of maintaining concentration within these strategies to ensure consistent performance and investor confidence.

It's been very helpful in having these multiple strategies. It's allowed us to maintain our promises to investors.

--- Brian Bares

This diversification has enabled Bares Capital to navigate market fluctuations and investor anxieties effectively, ensuring long-term success.

   

Market Cap Adaptation

As the market capitalization of companies evolved, Bares Capital adapted by expanding its focus beyond microcaps to include small and mid-large cap strategies 5. This shift was driven by the need to accommodate growing companies within their portfolio while maintaining a high level of qualitative research. Brian Bares highlights the dynamic nature of their investment process, which involves a rotating team of junior analysts to bring fresh perspectives to their strategies.

We have a rotating stable of junior analysts. So we hire people and put them to work, and then tell them, in three years, I got to go find different employment.

--- Brian Bares

This approach ensures that Bares Capital remains agile and responsive to changes in the investment landscape.