Concentrated portfolios - The Best way to hold stocks.
A diversified portfolio tells you two things. One is, your standards are falling. Or the other thing, the markets are incredibly cheap. So yes that itself gives you discipline. If you are finding it incredibly difficult finding your dozen good ideas, again it tells you that either your standards are way too high, so you are an academic or the market is probably overvalued at this point - Vinod Sethi Fmr Fund Manager at Morgan Stanley
The Robert Hag storm Study
Results of Concentration
STEP - 1 The Different Sample Size
|
Computer Randomly assigns from 1200 companies, 12000 portfolios of various sizes. For 10 years returns . |
| 3000 portfolios containing 250 stocks each |
| 3000 portfolios containing 100 stocks each |
| 3000 portfolios containing 50 stocks each |
| 3000 portfolios containing 15 stocks each |
STEP - 2 Results of the Sample analysis
| Stocks |
Best returns |
Worst returns
| Out perform |
| 250 |
16.0% |
11.4% |
63/3000 |
| 100 |
18.3% |
10.0% |
337/3000 |
| 50 |
19.1% |
8.6% |
549/3000 |
| 15 |
26.6% |
4.4% |
808/3000 |
| Gp |
13.8% |
|
Average |
| S&P |
15.2% |
|
Real |
The Final Answer
| Sample |
Chances of outperforming the market. |
Number of stocks that outperformed the market |
| With a 15 stock portfolio. |
1-in-4 |
(898/3000) |
| With a 250 stock portfolio. |
1-in-50 |
(63/3000) |
| Random returns are better with a focused portfolio. (Hence, Stock Selection) |
| Trading Costs and taxes are ignored but they would lower returns |
| (Study from The Warren Buffet Portfolio by Robert Hagstorm) |
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