A Concentrated portfolio is best personified by Warren Buffet who especially early in his career, wanted most of his money in his best ideas. he believed that he only could find a few very good ideas and when he found them he wanted to load up. If you read Buffet’s partnership letters from the early days, you’ll see that he occasionally had 40% of his money in one st0ck!
The idea is that you can reduce your risk but more importantly make a higher rate of return by concentrating on ideas that are researched most thoroughly, as opposed to a diversified portfolio where small allocations of each investment are owned because the investor doesn’t know enough about any one investment to risk a lot.
Big allocations could also be considered if risk management is in place with losses limited- such as in a trend following system. Furthermore, when considering stocks are part of your overall net worth, owning a lot of one stock may not be a bad idea if it is well-researched and if your net worth is allocated among real estate, owning a business, cash, and other assets. Something to think about.
Give us a call if you are intellectually pondering your portfolio ideas and want to discuss strategy. We’d enjoy talking to you – 781.393.0021.