Adamski wrote:Does anyone here run a concentrated portfolio, and how has it gone this year to date?
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Has a high conviction strategy served you effectively? And would you recommend it?
My experience:
(1) For the past ~decade: highly diversified, with a portfolio aimed at being pretty robust in the face of different economic & market outcomes. Hands-off, able to be left unmonitored for extended periods of time, sleep like a baby. Primary function: the old "protect & grow" mantra, with the growth engine being compounding over the years vs. moonshotty stuff. Easy!
(2) For nearly two decades prior to that: often highly concentrated portfolios, occasionally down to a single stock. This entailed watching both markets and my holdings like a hawk, to the extent of gaining knowledge akin to a virtual insider in one or two cases (NB nothing dodgy, You Honour). Very hands-on, continuous monitoring, (very) high risk with potential for high reward. Hard.
The concentrated portfolios worked out well for me - most of what I have was probably made in this way, concentrated in the periods when markets were most generous albeit most dangerous - I'm thinking here of the latter stages of the late-90s technology & mid/late-00s commodities markets, when rational secular growth trends morphed into "bubbles", proving hugely lucrative for some.
But I had a lot of luck, and you cannot count on luck as a strategy. Like most people for whom something has worked out well, my ego would have me believe "I made my own luck", but I'm rational enough to realise that I definitely didn't make all of the luck and perhaps I made hardly any of it, and was mostly just plain "lucky". There's no real way to analyse these things and tease out the luck from any possible application of skill and judgement. Repeatability can begin to suggest some presence of skill; but also the absence of repeatability doesn't
necessarily preclude some skill, since some circumstances (opportunities) might only occur very occasionally or even once in a lifetime and perhaps there is skill in identifying these opportunities that others miss? Philosophy aside, I do consider anyone who's enjoyed outsized success at anything to have also enjoyed a great pile of luck too, regardless of how hard they worked etc etc, and more luck than they're ever likely to realise or acknowledge because we all take so many fortuitous things for granted. Anyway, getting a bit sidetracked....
To the OP question posed re high conviction, "would I recommend it": I don't think many people should be running highly concentrated portfolios, at least in the manner that I did: for the vast majority, I think that investing should simply - and wisely - be a background activity like paying the mortgage, designed to secure people's long term financial futures. This is the rational thing to do, not a cop out. They've better, more rewarding, more interesting things to do with their lives than to focus much on investing. And they'll likely get (much) better results by avoiding anything that might be classed as "too clever by half", which may carry excessive risk in an attempt to deliver out-sized returns. You don't read so many BB posts from those people who ruined their finances by making concentrated bets on markets and losing, for whom sensible "Get Rich Slowly" methods, offering high probabilities of success, weren't enough.
But, for those who feel that investing might be their vocation or passion, and crucially (a)
have the (financial) capacity to accommodate additional risk, and (b) are not generally predisposed to gambling*, I would suggest considering high conviction strategies and highly concentrated portfolios for some of your money, at least for some of the time. If your smart, you'll find a way of doing this so that if it doesn't work out you don't jeopardise your future, ie. you structure this endeavour akin to an option, which will have a cost (a drag on returns) if it doesn't work out as you hope, but not a ruinous one, but with a fair wind might deliver a large payout / outsize returns.
*Be honest with yourself!