How to diversify

I am currently holing 14 positions over health, tech, mining, cars, finance, industrials and entertainment. I also have a position in crypto that I am speculating for the long game.

I got out of a global etf but do intend to get back in with a lump at some point.

Agree with @Rat_au_van I sometimes get carried away when researching new stocks and don’t want to miss out :face_with_monocle:

I think you’re right. It’s a concentration, not a diversification. And yes, I’m being 100% stock. I don’t normally think about investing in ETFs because I prefer to invest in companies that I can keep up with their growths. However, investing in an index track is something I was thinking of doing :+1:

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Where is this data from?

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Some thoughts

I’ve hear lots of people throw numbers around in that range, so it really depends exactly when you look, but I think it would be a very similar story for most major regions/periods. You can replicate it very easily to check an exact scenario, just pick a stock universe and a time period and count how many stocks it takes to make up the return.

Here’s the US market for 2010-2020 as an arbitrary example:

If you look at total capitalisation in the US it has grown by about 19tn or ~110% from 2010 to 2020

You would have got ~30% from government bonds of the same period, so where did the extra 80% (14T) return come from?

Just look at the top performers, during this time the top 25 stocks returned over 8.5 Trillion of growth! and we only need to add up about 100 stocks to get that 14T return out of around 4000 listed for the period.

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Usual great, thoughtful stuff from Howard Marks
https://www.oaktreecapital.com/insights/howard-marks-memos

Remember, if you over diversify and have too many individual companies in your portfolio, you might as well just buy a world tracker.

Simpler, cheaper and less time consuming (but also a bit boring).

surely it’s better to have a more diverse portofloio though?
So owning a bit of gold, productive businesses, bonds etc… ?

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Diversification is protection against ignorance, if you know what you are doing, you do not need to diversify. If you don’t know what you are doing, you need to diversify. My 3 biggest holdings are Square, Apple and Visa. Nearly half my money is in these companies. This is how you beat the market, concentrate on top companies with a wide economic moat and stickiness around their business.

But I’d rather own the productive businesses over bonds or gold. Bonds are only good if interest rates rise substantially, to say around 6-7% on the risk-free rate in the US. Stocks are better now, since interest rates are low.

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Personally I don’t have any gold exposure. It’s popular when people are worried about even bonds/gilts.

I go for ETFs/Funds to cover the mass market, have a small selection of stock picks, and finally some bond/gilts to round out any expected volatility and to have some more “reliable” income.

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You want to find the right stocks, at the right price and then swing for the fences. You don’t go half in or a quarter in or hold an index fund if you know what you are doing. If I find a wonderful business at a fair price, I’m going to put a lot of my wealth into it.

For the benefit of anyone new & to keep the discussion balanced, please remember that these companies may not do as well as Harihar is hoping.

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I agree, and it is a very valid point to mention that. I DO NOT recommend you buy those companies, I’m just saying 50% of my wealth is in them.

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makes sense, i’m a massive fan of Jack Dorsey, would’ve liked to invested in Sqaure but i feel like it’s too late. I’ve been reading that Stripe might IPO, which would be great news/

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I don’t think it is ever too late to invest in a company, it’s better to invest now than later. As a company matures, its EPS growth rate drops and stock price returns drop. I like Square because of its stickiness, it’s a bit like Apple, so many competitors but everyone wants to go with Square.

The valuation is an issue with Square and that is worth keeping in mind, it’s a long term hold for me either way. As always, do your own research with any investment, including Square.

You want to buy the superstars of tomorrow when they are young. Big companies can grow, but at a much slower pace.For Apple to double to a 2 trillion market cap is much harder than Square to double to a 60 billion market cap. However, smaller companies come with a lot more risk and capital can be destroyed very easily paying too high a price for earnings which never materialise.

Well Harihar doesn’t do that, but many others have had success doing exactly that.

As I think Harihar says in a different thread, novices might be better off with index funds. But we might extend that advice to “most investors” since the evidence (eg Spiva) suggests that it is very hard to reliably outperform the market or even select an expert to do it for you.

ie: many investors have enough time that “beating the market” isn’t a goal they need aim for or risk they need bear.

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When you look at the companies that are IPOing right now (Slack, AirBnB, Pinterest), surely these are the companies that can double in market cap, at the same time some are over inflated (Lyft, SnapChat) have all fallen heavily.

Many managers have outperformed, Peter Lynch, Warren Buffett etc. If you know what you are doing, it is likely you will outperform to some extent, even if that extent is a few percentage points a year.

By simply holding quality businesses at fair prices, means you will outperform the index, which is full of mediocre businesses at most, and a few quality and poor businesses.

Apple has outperformed the S&P 500, so have Visa, so has Square.

Everything comes down to valuation and the ability to drive future earnings. I would need to look at financials first, I want companies which can grow revenues year on year in double digits. I also want companies which can consistently do that. I like companies which have recurring streams of revenue. I like companies which have a moat around them, keeping the competition away.

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