Wednesday, April 5, 2017

Concentrated portfolio works best

I believe in concentrated portfolio, and not diversified portfolio.

I do not see why we have to practice diversification in investment when we practice concentration in other aspects of life.

When we study in school, we major in one branch of study.  If we are very smart, probably we can major in two branches of study.

We do not need to major in law, business, engineering and all other branches to succeed in life.

When we work, we work in one company at any given time, unless we cannot find a full time job, then we are forced to take on 2 part time jobs.

When we get married, we can only get married to a person.  We cannot have 2 or 3 spouses at the same time.

Diversification in work and marriage will cause a lot of problems.

That is the same approach when we invest our hard earned money.

We focus.  We must be very sure of the performance of the company before we sink in our money.

If we are wrong, the result is disastrous, but not as disastrous as getting married to the wrong person.

An investment portfolio can consist of more than one stock.  That is the fortunate thing.

It is best to have at most 5 stocks.  No point having more than that.

That is like saying that 5 persons staying in a household – namely you, your spouse and 3 kids.  You hardly have any spare time when you have a full time job, and your family responsibility.

That is why keep the concentrated portfolio to 5 companies. 

The key is to have the 5 companies in unrelated industries, and yet in industries that you can understand.

You can get 1 company in retail, such as a supermarket operator.  You can get 1 company in food and beverage sector.  Make sure that you like the food enough to notice when the quality drops, and customers start leaving.

You can get 1 company in engineering or utility, and another in construction or property.

You can get 1 company in consumer products, such as the one that makes your shampoo and shower cream.

It takes time to build up a concentrated portfolio, and once you have it, you have to pay attention to the changes taking place in real life before it takes place in the stock market.

If you buy into a food and beverage company because you love the coffee, and you patronized the outlet every day, you would notice when the quality and service drop.


If the quality and service keep dropping, and even you, as the regular customer, starts to go to its competitor, you must sell the stock.

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