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The DIY Investing Podcast

Do you want to learn how to manage your own investments? Are you ready to stop paying investment management fees and start building wealth? The DIY Investing Podcast is dedicated to providing you with the knowledge, skills, and resources you need to be a better investor. Learn how to make investments through the use of fundamental analysis, mental models, and business management insights.

 

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  1. All Episodes
  2. 120 - Philosophy of Concentrated Investing

120 - Philosophy of Concentrated Investing

Sep 5, 2021

Mental Models discussed in this podcast:

  • Concentration vs Diversification
  • Hurdle Rate
  • Circle of Competence
  • Conviction
  • Opportunity Cost
  • Satisficing

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode120

How many stocks should you own?

  • As many as you can that meet your hurdle rate?
  • Only the best opportunities available?
  • Optimal vs Satisficing

Constraints on Holdings:

  • Time
  • Circle of Competence
  • Conviction

Additional Thoughts

  • Collector of Businesses
  • Hypothetical:
    • What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge.
    • Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10.
  • What are you buying when buying a stock?
  • Concentration: " The number of stocks you own is dependent on how you view yourself as an investor." 
    • Is it possible to produce alpha?
      • If yes, concentrate
      • If no, diversify
    • Are you a good investor?
      • If yes, concentrate
      • If no, diversify
    • Conviction
      • If yes, concentrate
      • If no, diversify

Summary:

How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction.