There are a lot of questions on portfolio diversification.

Should I concentrate, or should I diversify…

After investing for some time, I realized that there really isn’t a one size fits all strategy.

At the end of the day…

It All Depends On Your
Risk Appetite, Goals
And Investment Style

The main reason why we diversify is to mitigate any possible error in our investment analysis. in other words, diversification reduces our risk exposure.

A concentrated portfolio is like making big bets. If the company goes south, you ‘lose’ all your money. Should you make the right bet, you’ll see your wealth ballooned almost overnight.

Now obviously, it seems like a diversified portfolio is the way to go as it mitigate risk… but bear in mind that when it comes to investing, we should only invest in good quality companies.

My style of investing is simple…

I don’t touch deep value or cheap stocks.

Only quality ones…

I don’t do speculative buys on stocks or opportunities that promise to 3X, 4X or 10X my money (ie Tesla).

I think that’s the key to making a concentrated portfolio work.

At the end of the day, the question is…

What is it that you want to achieve?

Are you looking to grow your money?

or are you looking to preserve it?

It was 5 years ago when I started my company.

We met with this multi-millionaire who just sold his company for US$586 million…

Till this day, I still remember his advice clearly…

“If You Want To Build Wealth,
You Concentrate. If You Want To
Preserve Wealth, You Diversify”

If you start to think clearly on this phrase, you’ll find that it makes a lot of sense. Be it in business, or in investment, this statement holds true till today.

Concentration also means more capital outlay per stock.

This in turn, translates to more capital return on your investment.

Of course, the question is, why can’t I pick all good quality companies and diversify at the same time…

It sounds very logical but yet, this itself is a challenge…

Which is easier to achieve…?

Picking 5 stocks that in the long run, gives you 50 – 100% in return.

or

Picking 20 stocks that in the long run, gives 50 – 100% in return?

I find it quite baffling, and think that this has to do with…

The Unchecked Risk Of Diversification

Think about this… when there are no constrain, there will be a lot of room to move around.

When you know you can own more stocks, there is room for any ‘ok’ business to slip pass the selection criteria.

I find that happening a lot to me, especially ‘speculative opportunities’ – Companies that doesn’t have a superior moat but does decently in the market.

The lesser the companies, the more stringent the selection criteria, shortlisting only companies that you really want to own.

Ever since I adopt this mentality, my portfolio result has been performing better than before, not only in returns, but in quantum as well – as we’ve established, the capital outlay per stock is bigger.

“Portfolio Concentration May Well Decrease Risk If It Raises Both The INTENSITY With Which An Investor Thinks About A Business And The Comfort Level He Must Feel”

~ Warren Buffett

Now of course, the other reason is that…

There Is Only So Much Time

Now obviously, there is also the time constraint.

I can only monitor a few companies given my already limited time.

I don’t want to go around tracking news, tracking performances, tracking valuation, thinking about which stocks to buy / sell etc

I only have so much time in hand…

After all, I am a retail investor, not a professional fund manager or a full time investor.

My portfolio deployment strategy should be build a round a retail investor, and not that of a fund management house.

I am also very aware of my current investment goals… which is to grow my money.

I guess this is why a concentrated portfolio suits me better than a diversified one.