The cons of owning a diversificated portfolio

The cons of owning a diversificated portfolio

As you know, diversification has been massively promoted as the optimal way to reduce risks and allows you to extend the reach of potential returns on multiple stock investments, something that you wouldn’t be able to do if you own only a few stocks.

But obviously, diversification has the strong tendency to reduce the returns of your biggest winners, furthermore producing more than average results, since from my opinion you can only have a few winners in your portfolio, as really good opportunities are not as numerous as you would think.
It can also be added that investors that focus on diversification, underestimate the energy that is required from them whenever rebalancing their portfolio is needed since you have to search for the right investment(s) (which is already a big responsibility in itself) to make sure that you respect “your diversification requirements”. Therefore, it can cause you to be forced to make a bad decision since you are limited in your investments choices as some of your greatest investments, if there are too big in weight, become automatically prohibited to respect the principle of diversification.
The phenomenon can truly appear to be unnatural as you have to restrict yourself from enjoying a potential moat that could return you much more than could be fathomed.

Starting from these arguments, I should mention that the reasons behind why I am so particularly prone to have a concentrated portfolio is because my risk appetite, at that specific moment in my life, allows me to. As a concentrated portfolio is riskier but enables more returns, I strongly think that this strategy is the best for someone that is starting to invest and/or still has to grow his capital. For a lack of words, there is no better moment to take that many risks.

Reading the book Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life from William Green, it came to my attention that some fund managers mentioned in book, such as Eveillard, never had the stomach to hold a concentrated portfolio to the contrary to individuals like Buffett and Munger. That fact made me realize that to own a concentrated portfolio you either must be absolutely certain in the quality of your investments, or exceptionally unaware. While some very talented investors such as Eveillard could not put their money in only a few securities as it would kill them of stress, other legendary investors admitted that you only have a few ideas, meaning that it is very difficult to find that many exceptional companies priced at fair or low price, admitting that to have that many investments thesis would be just impossible.

In my modest quality as a still young and learning value investor, I personally have witnessed that I am not able to find more than 5 to 10 qualitative investment thesis concerning stocks in sectors that I feel sufficiently comfortable, in which I absolutely trust the outcomes going my way.

To be able to put around 1/3 of your portfolio behind your idea might seem very stupid to most people, but if you are confident enough in your process, meaning that the facts behind your reasoning are so oblivious after long searches that there is so little room for mistakes, why would you not seize the opportunity?

And I am going to conclude by saying this: if it is too stressful for you to own a small list of stocks, then it means that you shouldn’t even invest in it.

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