Great write ups on such an important topic. The quotes from legendary investors that went all in on fraudulent businesses really brings the point home.
A good right up, there are definitely perils with concentration. However, I don't agree that concentration is bad. Some counters:
"Finally, for all the talk about concentration, Berkshire Hathaway owns 70+ companies and has 50+ stock positions." For your point on Buffet, he only has so many because he manages so much money. If you instead look at his early partnership days, where he is choosing his desired concentration instead of it being a function of Berkshire's size, he had a far more concentrated portfolio of a few core positions and 10+ smaller turnarounds. He took sizes at times of 30%+ in a single stock. Highlighting his Coke investment underperformance period is just selective picking, discounting the outperformanxe of Coke in the years before that, as well as the large outperformance by Apple recently.
The simulation of different numbers of positions is also not very useful, as the point of concentration is that there are only a few amazing investment opportunities at a certain point, so you would hope that the risk/rewards of your top 10 ideas are better on average than having 30-50 holdings. More than 50 might as well be an index fund, which be definition you will struggle to really outperform.
I prefer to follow what (most) of the best investors have done: Buffet, Mungar, Druckenmiller, Soros, Li Lou, which is better occasionally and concentrate big on your best ideas (if you can cope with the volatility, not many can)
In the first few years of my investment journey I religiously followed the advise of the big investors on concentration, luckily I didn’t do that bad, but as the portfolio value grew it was clear that concentration can lead to lower growth and higher risk. I often felt guilt for not having continued with a concentrated portfolio and often backtests ‘what if’ scenarios to see if I made a wrong decision, but the results always came out to support my decision to diversify. concentration still remains a goal, but with your article you made a good case for me to stop feeling guilty and drop that goal and continue what I am doing. Warren is not completely wrong even though he didn’t follow his own advise but the thing is we are not a Lilu or Pabrai to be able to continue to grow portfolio with less than 10 stocks.
Great write ups on such an important topic. The quotes from legendary investors that went all in on fraudulent businesses really brings the point home.
Thanks! There were so many more funny examples!
That’s why index fund/etf investment makes sense: diversification and automatic elimination of losers.
Yup. You can always get factor exposure for outperformance.
https://www.marketsentiment.co/p/beat-the-market
What a great content. Congrats
A good right up, there are definitely perils with concentration. However, I don't agree that concentration is bad. Some counters:
"Finally, for all the talk about concentration, Berkshire Hathaway owns 70+ companies and has 50+ stock positions." For your point on Buffet, he only has so many because he manages so much money. If you instead look at his early partnership days, where he is choosing his desired concentration instead of it being a function of Berkshire's size, he had a far more concentrated portfolio of a few core positions and 10+ smaller turnarounds. He took sizes at times of 30%+ in a single stock. Highlighting his Coke investment underperformance period is just selective picking, discounting the outperformanxe of Coke in the years before that, as well as the large outperformance by Apple recently.
The simulation of different numbers of positions is also not very useful, as the point of concentration is that there are only a few amazing investment opportunities at a certain point, so you would hope that the risk/rewards of your top 10 ideas are better on average than having 30-50 holdings. More than 50 might as well be an index fund, which be definition you will struggle to really outperform.
I prefer to follow what (most) of the best investors have done: Buffet, Mungar, Druckenmiller, Soros, Li Lou, which is better occasionally and concentrate big on your best ideas (if you can cope with the volatility, not many can)
Great article!
So buy S&P 500 and forget about it…
In the first few years of my investment journey I religiously followed the advise of the big investors on concentration, luckily I didn’t do that bad, but as the portfolio value grew it was clear that concentration can lead to lower growth and higher risk. I often felt guilt for not having continued with a concentrated portfolio and often backtests ‘what if’ scenarios to see if I made a wrong decision, but the results always came out to support my decision to diversify. concentration still remains a goal, but with your article you made a good case for me to stop feeling guilty and drop that goal and continue what I am doing. Warren is not completely wrong even though he didn’t follow his own advise but the thing is we are not a Lilu or Pabrai to be able to continue to grow portfolio with less than 10 stocks.