What percentage of concentration is too high in one stock?


After a strong bull run, some individual stocks can become very large and concentrated positions in our portfolios. When this happens, is it a good idea to buy more? It depends on the business and its ability to generate excellent returns on investment. In this segment of “Beat & Raise” on Motley Fool Live recorded on October 5, Fool.com contributors Jason Hall, Brian Withers and Nicholas Rossolillo look into this type of situation.

Jason Hall: We can actually wrap that around the idea of ​​thinking about income. Vihan specifically uses Reached (NASDAQ: UPST) for example. “If it went from 5% to 8% of my portfolio, would I continue to add Upstart, make it big or diversify it through different investments? I’m going to start with what I think about it. You directed it to me, Vihan. What I tend to do with position sizing is sizing my position in terms of whether or not to buy more shares, what percentage of my base cost have I invested in the business ? I don’t really look at the size of my wallet.

Obviously, when companies reach a certain threshold, that changes things a bit. But in general, because I have a very diverse portfolio, it currently has over 130 separate stocks. As a rule of thumb, my strongest ideas are that I am willing to invest up to two percent of my base cost. If the stock is five percent of my portfolio, I like its outlook and have only invested one percent of my cost base, I’m absolutely comfortable adding more money to it. I’m not quite 45 either, I’m 20 to continue investing for retirement, so 5-10% of my portfolio today is very different from five percent of my portfolio when I was in Brian’s situation, where I live half of my returns. I’m quite comfortable with this level today because I can grow by diversifying into other stocks and just the performance of my other stocks, catching up on overtime.

This is how I think about it. I’d love to hear you guys weigh in on that too. Just in terms of thinking from a quarterly cadence, a company like Upstart, for example, sometimes says to you, “Hey, this is a business, you might need to buy.” A business reports 90 percent revenue growth on a business idea that you weren’t sure would work, maybe it’s saying, “Hey, yeah.” Pseudo.

Nicolas Rossolillo: It depends on the company, I think. I also manage a very diverse portfolio, not 130 individual stocks.

Room: And grow …

Rossolillo: [laughs] It’s certainly not super concentrated either. Something gets about five percent, I’m starting to look at the very least, diversifying by adding more to something else. But it depends on the company. In my role as a professional fund manager, I don’t really see him as the fund manager. I guess that’s the job of the company. That’s why we invested, the company manages our money. I am more of a coach and where does a coach start? Evaluate the players and make sure they behave well together, the way you would expect.

It depends on where you are at, like you said Jason, where you are and what you are trying to accomplish with your investments that is really important. If you are trying to maximize growth and get the maximum return possible. It might make sense to approach a double-digit percentage of your portfolio at a company like Upstart, but it might not. You must be your own financial coach and remember that your actions, the companies in which you have an interest are players. How do these players affect your portfolio and the outcome you are trying to achieve?

Room: Brian.

Brian Withers: Yes. I own 20 stocks and only have three which make up over eight percent of my portfolio.

Room: This means that at least one or two are probably quite large sizes.

Withers: Yes. Free Mercado (NASDAQ: MELI) is the largest with 14 percent, Shopify (NYSE: SHOP) with 12, and Atlassian (NASDAQ: TEAM) with eight. From a MercadoLibre perspective, I’ve owned it for eight years. Encompassing this in our call for quarterly results, I had the chance to listen if I wanted to or read on 32 different MercadoLibre newsletters. Is the 33rd going to make a big difference to me one way or the other for MercadoLibre? Not really. They have built a very good reputation with me.

I like the thought of Nick on the coach. MercadoLibre is one of my star players, one of my favorites, the ones I’m going to put the ball in my hands with with two seconds to go and let them try to win the game. If Upstart is this for you and I think it would be really difficult for Upstart to be for you. Let me tell you why, they’ve been public for a year, not even a year. How many quarterly reports have you been able to listen to? I’m not saying don’t add more.

I have 20 shares, so my average stake is five percent. So already eight percent are already in the top bracket of the number of stocks in my portfolio. I look at the cost base that I add, but I also look at what the average is on all of this and I make decisions accordingly, and I will think about things in thirds. I’m going to move people from C team to B team to A team. I love this coach.

Rossolillo: I also like what you just said, Brian. MercadoLibre is your star player, but it took a while for it to achieve this status. Yes. How many seasons went by before Michael Jordan won his first championship? Seven seasons? Yes, I felt this really disturbing last year during the pandemic. I think a lot of new investors have built up a substantial amount of their net worth in a stock or two, which is pretty new, not a very long track record as a public company, but the company was showing growth in triple-digit sales. It’s fantastic. This could be an indication that this company is going to do great things over time. But you have to let the company prove it. A quarter or a year of performance doesn’t mean, “Okay, he’s now my star player.” There are too many good companies to say that.

Room: Yes. It’s funny, because I think it in a way, we think Brian’s portfolio is focused and mine is very diverse. There are 5,000 stocks that trade in the US markets. [laughs] I have a very concentrated portfolio. [laughs] I own maybe 26 percent of the number of stocks that are in the S&P 500. It’s concentrated.

I just wanted to get to MercadoLibre really quickly too because it’s still my biggest individual inventory and my cost base is still my one percent. Guess what? I have a lot of faith. It’s a company worth less than $ 100 billion, around $ 100 billion in market capitalization today. Do I think it may be a $ 500 billion business? Yeah, absolutely. I am doing this for the next 15 years. Do I think it will be a trillion dollar business? May be. Do I think he can beat the market in the next 20 years? Absoutely.

I think the point is that quarterly cadence can help you learn more about the business and think about your individual situation when deciding on the sizing of an investment, if that makes sense to you and if you have or not enough conviction in this business to add to it, or are there other actions you should add for various reasons.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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