120 - Philosophy of Concentrated Investing

Mental Models discussed in this podcast:

• Concentration vs Diversification
• Hurdle Rate
• Circle of Competence
• Conviction
• Opportunity Cost
• Satisficing

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode120

How many stocks should you own?

• As many as you can that meet your hurdle rate?
• Only the best opportunities available?
• Optimal vs Satisficing

Constraints on Holdings:

• Time
• Circle of Competence
• Conviction

Additional Thoughts

• Collector of Businesses
• Hypothetical:
  • What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge.
  • Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10.
• What are you buying when buying a stock?
• Concentration: " The number of stocks you own is dependent on how you view yourself as an investor."
  • Is it possible to produce alpha?
    • If yes, concentrate
    • If no, diversify
  • Are you a good investor?
    • If yes, concentrate
    • If no, diversify
  • Conviction
    • If yes, concentrate
    • If no, diversify

Summary:

How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction.