Diversified vs Concentrated Portfolios..

Message

    I think as an amateir u should have a diversified portfolio. Thereafter you can prune. tell me, how can i , a 27 year old, have a concentrated portfolio 
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Vivek it is something like the chicken and the egg race. Concentration comes from conviction which what ever anyone says comes only after you have made your first 5 bagger. Absolutely new commers should have at least 8 -10 stocks because to have a concentrated portfolio you need to understand the companies first. A few musts for having a concentrated portfolio: 

1) Always buy the sector leaders. They will rarely be extinguished.

2) Never buy on if that happens this will happen. For instance people can buy companies making set top boxes tghinking that if CAS happens they will gain.

3) Always have equal distribution. FOr instanmce if I have a portfolio of 4 stocks:

Portfolio 1- 
Stock A 55%
Stock B 20%
Stock C 13%
Stock D 12%

Portfolio 2

Stock A 30%
Stock B 25%
Stock C 23%
Stock D 22%

And assume you go wrong in the most weighted stock of both the portfolios Stock A:

In Portfolio 1 you would need to get 3 ideas correct to rectify this mistake

In Portfolio 2 you would require any one idea correct to rectify this mistake.

So having concentrated portfolios does not mean owing just 4 stocks but there has to be diversification amongst all these four  - Diversification in concentration is what I call this.

Edited by basant - 19/Sep/2006 at 11:18pm