Author Topic: Portfolio Concentration  (Read 6141 times)


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Re: Portfolio Concentration
« Reply #20 on: December 24, 2017, 08:54:49 AM »
Core to concentration is recognition that you are riding market cycles (macro tides), rather that names (boats on the tide). It's much less about selecting the best stock (boat), and more about knowing how to read a tide table (macro projection).

Diversification is only useful if you are investing in the tides at different places. If you're just investing in different boats on the same tide, at the same place, it's pretty useless. Hence either truly diversify, or don't do it at all - there is no in between.



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Re: Portfolio Concentration
« Reply #21 on: December 25, 2017, 02:26:05 AM »
if you want to create wealth, concentrate.  if you want to preserve wealth, diversify.

Well said! This is the risk variance graph from our corporate finance textbook - as you can see, after 5 stocks the slope of the curve flattens quite a bit; after 20 not much difference on adding the 21st
I think that graph is probably a bit deceptive. One portfolio of 20 stocks isn't going to behalve the same as another portfolio of 20 stocks. I guess here they averaged the results of multiple portfolio's (?) so you don't see the variance of the variance. And most investors don't buy portfolio's of random stocks; they buy something with a common theme because they think those are a good deal. Perhaps they focus on bank stocks, perhaps low P/B stocks, perhaps it's growth; whatever it is, you can be sure it will be more correlated and the portfolio will not behave like that graph.


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Re: Portfolio Concentration
« Reply #22 on: December 25, 2017, 03:26:41 AM »
To go back to the core small business / single security debate.  One of the advantages to securities is that you can fractionally own them, this is much harder with a small business.  By going 100% on a single stock I think you are losing out on this advantage.  I can't help thinking that you should be able to find 2 stocks.  Maybe go 60/40 if one is better odds.  Even with berkshire which is perhaps the safest company on the planet , you just never know.  Some legal issue or unforeseen event can always take it down.   Live to fight another day, the way I see it.  If you can find stocks with 100% upside, then you will be able to make it back. Even if you lose half your money on a bad stock pick it will just set you back a couple years until the other stock pays off. 

I think again it really comes down to the amount of time it would take to rebuild your portfolio, then adjusted for your age.   There is a certain point where going all in on one stock just doesn't make sense, in my opinion.  Regardless of the potential return.

Totally agree with everything you mention in this post. I try to hold 20 stocks if I can find 20 good ones, but if I can only find 4 at certain times then I will concentrate heavily in those or hold some cash, but I think what's written above is very sensible.


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Re: Portfolio Concentration
« Reply #23 on: March 11, 2018, 10:59:52 AM »
Focused Compounding podcast on concentration vs diversification:
"Most haystacks don't even have a needle." |  I'm on Twitter  | Interesting podcast on aging research


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Re: Portfolio Concentration
« Reply #24 on: March 11, 2018, 11:10:00 AM »
#1 is higher reward. Buffet is a bit disingenious when on CNBC he says don't use leverage because you can get rich slow and don't risk what you need for what you don't. I mean reading that I'm thinking, you need the carry cost - your rent and living expenses. It won't work if you don't have the day job, or enough capital to slowly sell down . The guy had a safety net and investment partners and a salary so of course he could think no leverage.
You could do #2 on might be better than #1 and crash and burn. But the reward of #1 can be so large. Why not a mix of #1 and #2?

Graham Osborn

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Re: Portfolio Concentration
« Reply #25 on: March 11, 2018, 04:46:05 PM »

Time will tell, but imho wealth is created by concentrating in good ideas, as long as you donít lose money doing so. Otherwise whatís your edge over simply indexing (when valuations are reasonable)

Many have had phenomenal returns with a large portfolio.  Lynch owned on the order of hundred(s) of stocks and he killed the index. So did Schloss.  Even buffett had around 100 holdings in the 60's.

I think concentration on half dozen stocks should absolutely be value plays. That is they should be sure bets on undervalued assets -- not earnings.

True, but that's not what the OP was asking.  He was asking about concentration limits - the max % you should allow for given position.  For Buffett in the BPL days that was 40% (market/ assets vs cost/ assets).  I don't believe he ever prescribed a rule for cost/ assets, but looking at Berkshire's insurance portfolio in the 70s it was definitely up there around 20% at times.

For me max cost/ assets is 20%.  To calculate the right level of diversification for you you need to estimate the average upside for an idea, the probability of that upside, and same two variables for the downside.  Then you set the threshold probability of achieving the expectation, which for me is 95% (assuming the downside is acceptable).  If you suck at picking stocks, you need more diversification.  And if you are doing higher-uncertainty stuff like venture capital you need much more diversification - typically at least 80 investments for an investor with average selection ability.

For me I say my target stock is a 10X over 10 years and I assume my probability of making that selection in any given case is around 20%.  If you build in a margin of safety so your downside is 0.5X-1X, that math is pretty attractive over a 10-year period.

The people with truly insane IRRs are the superangels with really good selection ability and cyclical tailwinds.  I think Chris Sacca's IRR for lowercase was around 57%.
« Last Edit: March 11, 2018, 04:48:56 PM by Graham Osborn »