Concentration risk over-rated?

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Anon9001
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Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 9:50 am

I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.

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Re: Concentration risk over-rated?

Post by theorist » Tue Jul 28, 2020 9:58 am

This is anecdotal based on a tiny sample size and so it is hard to evaluate your claim. If you either make a quantitative definition of “quality stocks” so one can test the claim systematically based on previous data, or record predictions going forward about a large number of stocks you subjectively feel are of high quality so we can test their performance vs the benchmark, we can judge whether you’re on to something or not.

Otherwise, it could be that you just got lucky.

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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 10:05 am

OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool

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Re: Concentration risk over-rated?

Post by nisiprius » Tue Jul 28, 2020 10:08 am

If you assume that you are able to pick stocks that will be less risky than the average stock, then of course you will have less risk by concentrating in them than you would have if you invest in the total market.

Similarly, if you assume that you are able to pick stocks that will have higher return than the average stock, then of course you will have more return by concentrating in them than you would have if you invest in the total market.

The whole Boglehead idea is that surprisingly, it is not at all easy to identify stocks that are better than average, and when you think you are doing it, you are probably just having a run of good luck.
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Re: Concentration risk over-rated?

Post by TheTimeLord » Tue Jul 28, 2020 10:10 am

Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Actually, I would guess the monkey throwing darts would produce less risk because when you pick "good" companies, you pick companies with higher expectations that will be punished harder for not exceeding those expectations.
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:10 am

KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.

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Re: Concentration risk over-rated?

Post by TheTimeLord » Tue Jul 28, 2020 10:13 am

Anon9001 wrote:
Tue Jul 28, 2020 10:10 am
KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.
Your confidence is admirable, but I would guess luck, timing and macro economics will play more in your success or failure than skill in evaluating companies future prospects by looking at past results.
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:14 am

theorist wrote:
Tue Jul 28, 2020 9:58 am
This is anecdotal based on a tiny sample size and so it is hard to evaluate your claim. If you either make a quantitative definition of “quality stocks” so one can test the claim systematically based on previous data, or record predictions going forward about a large number of stocks you subjectively feel are of high quality so we can test their performance vs the benchmark, we can judge whether you’re on to something or not.

Otherwise, it could be that you just got lucky.
Consistent positive free cash flows. Return greater than cost of capital. Should have some moat preventing competition from disrupting it. I am 100% positive on this company being less risky than the index.

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Taylor Larimore
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Re: Concentration risk over-rated?

Post by Taylor Larimore » Tue Jul 28, 2020 10:18 am

Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Anon9001:

I am glad that your investment has fallen less than "Diversified" Index Nifty 500". Nevertheless, your future chances are not good. Read what experts say:

viewtopic.php?t=156576

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Attempting to build an investment program around a handful of individual securities is, for all but the most exceptional investors, a fool's errand."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Concentration risk over-rated?

Post by Chip » Tue Jul 28, 2020 10:19 am

Anon9001 wrote:
Tue Jul 28, 2020 10:14 am
I am 100% positive on this company being less risky than the index.
It's good that you're not overconfident in your analytical abilities. :shock:

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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 10:20 am

Anon9001 wrote:
Tue Jul 28, 2020 10:10 am
KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.
Are you paid annually in the 7 figures range to evaluate companies' financial performance? If the answer is yes, then, obviously, you know what quality means.

If you don't, why do you think that you can do better than my family member?

KlangFool

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Re: Concentration risk over-rated?

Post by Triple digit golfer » Tue Jul 28, 2020 10:21 am

How do you know what a "quality stock" is ahead of time?

You don't.

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:23 am

KlangFool wrote:
Tue Jul 28, 2020 10:20 am
Anon9001 wrote:
Tue Jul 28, 2020 10:10 am
KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.
Are you paid annually in the 7 figures range to evaluate companies' financial performance? If the answer is yes, then, obviously, you know what quality means.

If you don't, why do you think that you can do better than my family member?

KlangFool
Herd mentality is very common among people. I would not be surprised if your family member bought it assuming it was quality when it wasn't. I myself don't look at stock markets daily to avoid doing anything stupid if the index falls or rises by significant amounts.

quantAndHold
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Re: Concentration risk over-rated?

Post by quantAndHold » Tue Jul 28, 2020 10:26 am

I worked in tech for 30 years, through the dotcom bust and the global financial crisis. I can give plenty of anecdotes about people I personally knew who were overly concentrated and had life changing impacts when things went south, and you will brush them all off and tell me that the people chose “quality” poorly. Some might have chosen poorly, although it only became obvious in the rear view mirror. Mostly, the big mistake was that they were too concentrated in one thing.

If it were that easy to choose quality, wouldn’t everyone just avoid the losers and choose quality? Even the pros, people who spend 50 hours plus per week, for years, usually can’t do what you’re proposing consistently. You might want to do a google search on Dunning-Krueger effect, and think about how it might apply to stock picking.
Yes, I’m really that pedantic.

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:27 am

Chip wrote:
Tue Jul 28, 2020 10:19 am
Anon9001 wrote:
Tue Jul 28, 2020 10:14 am
I am 100% positive on this company being less risky than the index.
It's good that you're not overconfident in your analytical abilities. :shock:
The company itself is having majority of it's assets in debt funds and tax free bonds. It is also having a fixed recurring revenue called annual issuer charges which form 30% of the revenue of the company. Despite the majority in debt funds and tax free bonds it is generating ROE exceeding it's cost of capital. The only risks I see for the company are Indians not moving to financial assets from physical assets and possible entry of third company into space. Right now only one competitor is there and they target different customer to it.

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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 10:29 am

Anon9001 wrote:
Tue Jul 28, 2020 10:23 am
KlangFool wrote:
Tue Jul 28, 2020 10:20 am
Anon9001 wrote:
Tue Jul 28, 2020 10:10 am
KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.
Are you paid annually in the 7 figures range to evaluate companies' financial performance? If the answer is yes, then, obviously, you know what quality means.

If you don't, why do you think that you can do better than my family member?

KlangFool
Herd mentality is very common among people. I would not be surprised if your family member bought it assuming it was quality when it wasn't. I myself don't look at stock markets daily to avoid doing anything stupid if the index falls or rises by significant amounts.
Anon9001,

LOL!

So, you are claiming a finance professional that are paid 7 figures in annual salary and bonuses do not know how to evaluate the company financial performance better than you?

I know that I know nothing.

KlangFool

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:40 am

KlangFool wrote:
Tue Jul 28, 2020 10:29 am
Anon9001 wrote:
Tue Jul 28, 2020 10:23 am
KlangFool wrote:
Tue Jul 28, 2020 10:20 am
Anon9001 wrote:
Tue Jul 28, 2020 10:10 am
KlangFool wrote:
Tue Jul 28, 2020 10:05 am
OP,

My family member worked on Wall Street. He was paid 7 figures in annual salary and bonuses. He lost 10 million in buying quality Telecom Stocks during the Telecom Bust.

KlangFool
Quality based on what metric? Did the companies generate consistent free cash flows? Did the companies generate a return on equity greater than it's cost of capital? Your friend might have bought junk instead of quality. I don't invest in companies that don't fulfill these two criteras. Also I avoid companies run by Government.
Are you paid annually in the 7 figures range to evaluate companies' financial performance? If the answer is yes, then, obviously, you know what quality means.

If you don't, why do you think that you can do better than my family member?

KlangFool
Herd mentality is very common among people. I would not be surprised if your family member bought it assuming it was quality when it wasn't. I myself don't look at stock markets daily to avoid doing anything stupid if the index falls or rises by significant amounts.
Anon9001,

LOL!

So, you are claiming a finance professional that are paid 7 figures in annual salary and bonuses do not know how to evaluate the company financial performance better than you?

I know that I know nothing.

KlangFool
The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:46 am

The regression beta on CDSL also is 0.81276 when compared to NIFTY 500. Low beta stocks are quality. I myself feel fine investing in this company but I will tone it down when I get older. If you don't take risks you also don't make money.

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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 10:47 am

Anon9001 wrote:
Tue Jul 28, 2020 10:40 am

The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.
Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:52 am

KlangFool wrote:
Tue Jul 28, 2020 10:47 am
Anon9001 wrote:
Tue Jul 28, 2020 10:40 am

The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.
Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool
ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.

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Re: Concentration risk over-rated?

Post by nisiprius » Tue Jul 28, 2020 10:52 am

What we are trying to tell you is that we've heard all this before. And many investment writers will suggest this approach--use fundamental analysis to identify a few superior stocks. There's even a slogan for it. Diversification is often expressed in the folk saying "don't put all your eggs in one basket." Your kind of concentration is expressed in a take-off: "Put all your eggs in one basket--and watch that basket."

People advocate this because it is much more lucrative for them. Index investing is boring, and most of the investment industry can't make much money out of it. The US investment-show TV star Jim Cramer has made a career out of advising people to invest in only 5-10 stocks. They could of course be right, but Bogleheads don't think they are and we have decent evidence for it.

Almost everyone starts out by believing it must be easy to do better than just simply buying the market in an index fund. But, amazingly--and it is amazing--it really isn't so. Thousands of actively managed stock mutual funds try to do exactly that. They are managed by professionals with access to data sources you and I don't have, working a full work day at it. And yet over the last fifteen years 90% of them failed.

An article--old, and I wish he'd update it--by Dr. William J. Bernstein is entitled The Fifteen-Stock Diversification Myth. He goes into the reasons why various authorities have suggested that fifteen stocks is enough for adequate diversification, and the reason why he thinks this is dangerously wrong. Basically, the reason is that most stocks on the average do not do any better than Treasury bills. (Another paper recently bore this out). Most of the return of the stock market is always the result of huge returns from a very small number of "superstocks." The problem is that, no, you can't tell which they are. So the soundest strategy is to own the whole market, to make sure that you do not miss out on them, despite the resulting dilution. Of course it would be better just to buy the superstocks. It would also be better yet "just" to win the state lottery.
Last edited by nisiprius on Tue Jul 28, 2020 10:55 am, edited 1 time in total.
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 10:55 am

quantAndHold wrote:
Tue Jul 28, 2020 10:26 am
I worked in tech for 30 years, through the dotcom bust and the global financial crisis. I can give plenty of anecdotes about people I personally knew who were overly concentrated and had life changing impacts when things went south, and you will brush them all off and tell me that the people chose “quality” poorly. Some might have chosen poorly, although it only became obvious in the rear view mirror. Mostly, the big mistake was that they were too concentrated in one thing.

If it were that easy to choose quality, wouldn’t everyone just avoid the losers and choose quality? Even the pros, people who spend 50 hours plus per week, for years, usually can’t do what you’re proposing consistently. You might want to do a google search on Dunning-Krueger effect, and think about how it might apply to stock picking.
The pros themselves have a big issue in that they have to benchmark themselves to a index and get fired for deviating too much from the index as that causes them to under-perform for short time periods even though that is what is required to generate significant alpha. If you don't believe look into any active fund with a benchmark. Usually the deviations are not much from the Index in security and sector weights.

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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 11:01 am

nisiprius wrote:
Tue Jul 28, 2020 10:52 am
What we are trying to tell you is that we've heard all this before. And many investment writers will suggest this approach--use fundamental analysis to identify a few superior stocks. There's even a slogan for it. Diversification is often expressed in the folk saying "don't put all your eggs in one basket." Your kind of concentration is expressed in a take-off: "Put all your eggs in one basket--and watch that basket."

People advocate this because it is much more lucrative for them. Index investing is boring, and most of the investment industry can't make much money out of it. The US investment-show TV star Jim Cramer has made a career out of advising people to invest in only 5-10 stocks. They could of course be right, but Bogleheads don't think they are and we have decent evidence for it.

Almost everyone starts out by believing it must be easy to do better than just simply buying the market in an index fund. But, amazingly--and it is amazing--it really isn't so. Thousands of actively managed stock mutual funds try to do exactly that. They are managed by professionals with access to data sources you and I don't have, working a full work day at it. And yet over the last fifteen years 90% of them failed.

An article--old, and I wish he'd update it--by Dr. William J. Bernstein is entitled The Fifteen-Stock Diversification Myth. He goes into the reasons why various authorities have suggested that fifteen stocks is enough for adequate diversification, and the reason why he thinks this is dangerously wrong. Basically, the reason is that most stocks on the average do not do any better than Treasury bills. (Another paper recently bore this out). Most of the return of the stock market is always the result of huge returns from a very small number of "superstocks." The problem is that, no, you can't tell which they are. So the soundest strategy is to own the whole market, to make sure that you do not miss out on them, despite the resulting dilution. Of course it would be better just to buy the superstocks. It would also be better yet "just" to win the state lottery.
While I respect you incredibly the Bernstein article you quoted was done during time of tech bubble in USA which had extreme skewness compared to other time periods. A research paper I saw which had a broader time period said only 35 stocks chosen randomly from S&P 500 was enough to only have 20 basis points cost. That is assuming randomly chosen. If you do basic research the number goes down I assume. I never bought the idea of buying 500 mediocre companies was safer than owning 1 quality company. Even Buffet agrees with me on this.

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Re: Concentration risk over-rated?

Post by abuss368 » Tue Jul 28, 2020 11:03 am

Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Diversification is the only free lunch in investing!
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 11:05 am

Anon9001 wrote:
Tue Jul 28, 2020 10:52 am
KlangFool wrote:
Tue Jul 28, 2020 10:47 am
Anon9001 wrote:
Tue Jul 28, 2020 10:40 am

The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.
Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool
ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.
Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool

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Re: Concentration risk over-rated?

Post by snailderby » Tue Jul 28, 2020 11:08 am

Concentration risk is "the risk of amplified losses that may occur from having a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio." https://www.finra.org/investors/learn-t ... ation-risk. Holding one stock, even if that stock is a "quality" stock, is a perfect example of concentration risk. The fact that you are "100% positive" about this stock doesn't negate that.

Consider this collection of quotes, compiled by Taylor Larimore:
Alpha Architect: "Between 1983 and 2006, around 73% of firms had a drawdown larger than 50% (the S&P 500’s maximum drawdown during this period was around 44%). Holding one individual stock can be very risky!"

Barber and Odean Study: "Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earned an annual return of 11.4 percent, while the market returned 17.9 percent."

Michael Batnick, CFA: "Ordinary investors would be well served if they thought for a second about who they were transacting with. Over 90% of today’s volume is done by institutions, so chances are that your counter-party has done their homework."

Brett Arends, Wall Street Journal columnist: "Buy individual stocks only as a gamble."

Benjamin Graham: "I have little confidence, even in the ability of analysts, let alone untrained investors, to select common stocks what will give better than average results."

Bill Bernstein, author of The Four Pillars of Investing: "Picking individual stocks is like volleying with the Williams sisters."

Jack Bogle: "Attempting to build an investment program around a handful of individual securities is, for all but the most exceptional investors, a fool's errand."

Adam Bold, author, adviser: "Mutual funds don't have the pizzazz of the hot stocks of the moment. If you're looking for entertainment, go gambling in Las Vegas. But if you want to accumulate real money for your retirement and other goals, mutual funds are the safer bet."

Warren Buffett: “I don’t think most people are in a position to pick single stocks.”

James Dahle, MD, financial advisor, and author of The White-Coat Investor: “Think you know how to pick stocks? Then guess again. Every time you buy or sell the person on the other side of the trade likely has an IQ of 160, spends 70 hours per week analyzing his industry, and has access to computing power and databases you can only dream of.”

Dalbar Research Report (July 15, 2003): "The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually for the last 19 years."

Charles Ellis author of Winning the Loser's Game: "If you, like Walter Mitty, still fantasize that you can and will beat the pros, you'll need both luck and prayer."

Evanson Asset Management: "Unfortunately, stock trading is a form of gambling and has the same outcome."

Kenneth French: Former President of the American Finance Association: "The market is smarter than we are and no matter how smart we get, the market will always be smarter than we are."

Sy Harding, Forbes contributor: "My advice – avoid individual stocks! Even experienced full-time professional money managers, with staffs of trained people performing research, with access to data, software, and corporate contacts that most part-time investors could not come close to duplicating, struggle to match the market’s performance by buying, holding, or selling individual stocks."

Danial Kahneman, Nobel Laureate: "There is general agreement among researchers that nearly all stock pickers, whether they know it or not-and few of them do-are playing a game of chance."

Kiplinger Personal Finance “Eight Stocks to Buy Now” in the January, 2015 forecast issue under-performed its “Five Stocks to Sell” twelve months later.

Michael Lewis, former bond broker and financial journalist: "A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients' money on to people who, as a whole, cannot possibly outperform the market."

Mathwizard: The vast majority of trades you would make are between you and a professional investor. Both of you are assigning a value to the stock, and one of you thnks the price is high and another thinks it is low. Who do you suppose is more likely to be right.

Charlie Munger, Warren Buffett's partner: "Teaching young people to actively trade stocks is like starting them on heroin."

Mike Piper, CPA, Financial Author: "Don’t invest in any individual stocks unless you can honestly state that you know something the market doesn’t. (And don’t underestimate the depth and breadth of the market’s knowledge.)"

Standard & Poor's: When the S&P 500 index was officially formed in 1957 to its 50th anniversary in 2007, only 86 of the original 500 companies still remained.

Larry Swedroe, author of many financial books: "Owning individual stocks and sector funds is more akin to speculating, not investing."

David Swensen, Chief Investment Officer of Yale University: "There's no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, extremely educated individuals who spend their entire professional careers trying to pick stocks."

Eric Tyson, author of Mutual Funds for Dummies: The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time, experienced money managers is, how should I say, ludicrous and absurd."

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Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 11:15 am

KlangFool wrote:
Tue Jul 28, 2020 11:05 am
Anon9001 wrote:
Tue Jul 28, 2020 10:52 am
KlangFool wrote:
Tue Jul 28, 2020 10:47 am
Anon9001 wrote:
Tue Jul 28, 2020 10:40 am

The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.
Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool
ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.
Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool
I haven't done ROI calculation for both but the ROE for the company is 13-16%. The index itself has given high returns of 15% in past but India was also much riskier in the past I would assume a 8-10% return for the index now compared to before due to India being in much better shape after 1991.

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nisiprius
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Re: Concentration risk over-rated?

Post by nisiprius » Tue Jul 28, 2020 11:17 am

Anon9001 wrote:
Tue Jul 28, 2020 10:55 am
...If you don't believe look into any active fund with a benchmark. Usually the deviations are not much from the Index in security and sector weights...
I just looked at one. I chose it because it is registered as a "non-diversified" fund, because it is famous, and because for a very long time was run by one of Warren Buffett's "superinvestors of Graham and Doddsville."

The fund is the Sequoia Fund, SEQUX, in the past often cited by believers as proof of the existence of active management skill.

The fund's prospectus indicates that it benchmarks itself to the S&P 500.

As of the 12/31/2019 annual report, it was only invested in 24 stocks.

I don't know what you consider to be "much deviation" but I would say that it deviates quite a lot from its category average.

Zero investment in five sectors.
Heavy overweight in financials, and communications.
Far underweight in technology (half the average) and healthcare (1/3rd the average).

Image

So, it is not true that active funds are all closet index funds. I think you can find the ones that aren't by looking for "non-diversified" funds" or funds with a high "active share."

If you'd invested in it before 2014, you would have seen more than thirty years of outperformance. But this is what has happened since:

Source

Image

This concentrated fund went from having a Morningstar five-star rating to a one-star rating. There was risk in concentration. In 2015 the risk showed up. They made a heavy investment, putting over 30% of their portfolio into a single stock, Valeant. I have no doubt at all that these professionals did the same kind of fundamental analysis you are doing and that believed that they had a low-risk, high-quality stock.

They sunk a fund with a thirty-year history of excellence in one year by making one concentrated investment. Professionals. If that's not "concentration risk" I don't know what is.
Last edited by nisiprius on Tue Jul 28, 2020 11:23 am, edited 3 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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BeBH65
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Re: Concentration risk over-rated?

Post by BeBH65 » Tue Jul 28, 2020 11:18 am

Anon9001,

If I remember correctly you are at the beginning of your investment career.
Please listen to the veterans on this forum who have seen it all and have recognized the value of the Boglehead principles through the years.
There is a reason why "Diversify" is one of them.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

KlangFool
Posts: 16992
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Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 11:30 am

Anon9001 wrote:
Tue Jul 28, 2020 11:15 am
KlangFool wrote:
Tue Jul 28, 2020 11:05 am
Anon9001 wrote:
Tue Jul 28, 2020 10:52 am
KlangFool wrote:
Tue Jul 28, 2020 10:47 am
Anon9001 wrote:
Tue Jul 28, 2020 10:40 am

The reality is even the wise among us can be taken in by greed of investing in something that has done well in the past and assuming it can continue to do so. Look at this forum abandoning Ex-US investments for example. I myself have not chased past performance with this company. If you looked at the chart fully the performance since IPO has not been good until recently. I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.
Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool
ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.
Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool
I haven't done ROI calculation for both but the ROE for the company is 13-16%. The index itself has given high returns of 15% in past but India was also much riskier in the past I would assume a 8-10% return for the index now compared to before due to India being in much better shape after 1991.
Anon9001,

So, you gamble on a stock that had returned less than the index or not significantly better than the index. Even if you are right, you are not rewarded for your gamble. It is a lose-lose proposition. And, you believe that this is a good idea. What do I miss here?

KlangFool

Topic Author
Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 11:31 am

nisiprius wrote:
Tue Jul 28, 2020 11:17 am
Anon9001 wrote:
Tue Jul 28, 2020 10:55 am
...If you don't believe look into any active fund with a benchmark. Usually the deviations are not much from the Index in security and sector weights...
I just looked at one. I chose it because it is registered as a "non-diversified" fund, because it is famous, and because for a very long time was run by one of Warren Buffett's "superinvestors of Graham and Doddsville."

The fund is the Sequoia Fund, SEQUX, in the past often cited by believers as proof of the existence of active management skill.

The fund's prospectus indicates that it benchmarks itself to the S&P 500.

As of the 12/31/2019 annual report, it was only invested in 24 stocks.

I don't know what you consider to be "much deviation" but I would say that it deviates quite a lot from its category average.

Zero investment in five sectors.
Heavy overweight in financials, and communications.
Far underweight in technology (half the average) and healthcare (1/3rd the average).

Image

So, it is not true that active funds are all closet index funds. I think you can find the ones that aren't by looking for "non-diversified" funds" or funds with a high "active share."

If you'd invested in it before 2014, you would have seen more than thirty years of outperformance. But this is what has happened since:

Source

Image

This concentrated fund went from having a Morningstar five-star rating to a one-star rating. There was risk in concentration. In 2015 the risk showed up. They made a heavy investment, putting over 30% of their portfolio into a single stock, Valeant. I have no doubt at all that these professionals did the same kind of fundamental analysis you are doing and that believed that they had a low-risk, high-quality stock.

They sunk a fund with a thirty-year history of excellence in one year by making one concentrated investment. Professionals. If that's not "concentration risk" I don't know what is.
30%?! I myself only have 10% in CDSL. Valeant was always playing with fire overpricing these rare drugs and hoping no-one notices that they are doing it. The company I am invested in doesn't do any unethical things like that. There is a risk to everything. The risk that equities don't outperform bonds for instance. The risk that you could get in a car accident and meet your untimely demise. I am comfortable with this risk for my age. If I was much older I would change my mind but thanks for the warning I will be careful to rebalance if the position becomes too large :sharebeer

Topic Author
Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 11:35 am

KlangFool wrote:
Tue Jul 28, 2020 11:30 am
Anon9001 wrote:
Tue Jul 28, 2020 11:15 am
KlangFool wrote:
Tue Jul 28, 2020 11:05 am
Anon9001 wrote:
Tue Jul 28, 2020 10:52 am
KlangFool wrote:
Tue Jul 28, 2020 10:47 am


Anon9001,

<<I invest in this because I believe in the future of this company and don't see anything dangerous in investing in a company that has majority of it's assets in debt instruments.>>

This is obviously not a good reason to invest in any company.

What is the best case Return on Investment (ROI) for this bet?

KlangFool
ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.
Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool
I haven't done ROI calculation for both but the ROE for the company is 13-16%. The index itself has given high returns of 15% in past but India was also much riskier in the past I would assume a 8-10% return for the index now compared to before due to India being in much better shape after 1991.
Anon9001,

So, you gamble on a stock that had returned less than the index or not significantly better than the index. Even if you are right, you are not rewarded for your gamble. It is a lose-lose proposition. And, you believe that this is a good idea. What do I miss here?

KlangFool
This is a joke right? The ROE is depressed by the amount of cash it holds on balance sheet. If it gets rid of the debt funds and tax free bonds it goes to 40-50%. They could distribute it all of it as dividends. I wouldn't invest in this company if they didn't pay dividends due to the large cash they have relative to their balance sheet.

randomguy
Posts: 9118
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Re: Concentration risk over-rated?

Post by randomguy » Tue Jul 28, 2020 11:37 am

Anon9001 wrote:
Tue Jul 28, 2020 11:01 am

While I respect you incredibly the Bernstein article you quoted was done during time of tech bubble in USA which had extreme skewness compared to other time periods. A research paper I saw which had a broader time period said only 35 stocks chosen randomly from S&P 500 was enough to only have 20 basis points cost. That is assuming randomly chosen. If you do basic research the number goes down I assume. I never bought the idea of buying 500 mediocre companies was safer than owning 1 quality company. Even Buffet agrees with me on this.
The papers methodology results in a skew towards the superperformers. In 1990, dell wouldn't have been an option. The odds of a big winner showing up from the sea of 5000+ companies is pretty large. Your odds of picking that 1 company is pretty small. And by the time they hit the S&P 500, the years of major outperformance are often gone. If the paper would have picked the stocks in 1989 and tracked performance, I expect things would have clumped together more. And if you actually diversify. your portfolio (i.e. 15 stocks across 5 sectors not 15 stocks in 1 or 2), I expect the results would also narrow down.

And of course with 15 stocks at some point you need rules for replacing them. No need to ride Sears to zero...

KlangFool
Posts: 16992
Joined: Sat Oct 11, 2008 12:35 pm

Re: Concentration risk over-rated?

Post by KlangFool » Tue Jul 28, 2020 11:45 am

Anon9001 wrote:
Tue Jul 28, 2020 11:35 am

This is a joke right? The ROE is depressed by the amount of cash it holds on balance sheet. If it gets rid of the debt funds and tax free bonds it goes to 40-50%. They could distribute it all of it as dividends. I wouldn't invest in this company if they didn't pay dividends due to the large cash they have relative to their balance sheet.
Anon9001,

1) How long would you wait for this to happen?

2) Why would this matter? Let's assume that you are right and this stock return 50% over one year, why would this matter? This is for 10% of your portfolio. You gain 50% of 10% = 5% extra for your portfolio. Why does this matter?

I do not gamble on a stock unless it has the possibility of returning 10X to 30X.

KlangFool
Last edited by KlangFool on Tue Jul 28, 2020 11:46 am, edited 1 time in total.

jarjarM
Posts: 155
Joined: Mon Jul 16, 2018 1:21 pm

Re: Concentration risk over-rated?

Post by jarjarM » Tue Jul 28, 2020 11:46 am

Anon9001 wrote:
Tue Jul 28, 2020 11:35 am
KlangFool wrote:
Tue Jul 28, 2020 11:30 am
Anon9001 wrote:
Tue Jul 28, 2020 11:15 am
KlangFool wrote:
Tue Jul 28, 2020 11:05 am
Anon9001 wrote:
Tue Jul 28, 2020 10:52 am

ROI is better than the index due to it's competitive advantages in that it only has one competitor which targets different set of customers and it is a capital light business which does not require huge capex to fund operations. This is a Warren Buffet type of company in that you need to take a long term view on it as it requires Indians moving more to financial assets.
Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool
I haven't done ROI calculation for both but the ROE for the company is 13-16%. The index itself has given high returns of 15% in past but India was also much riskier in the past I would assume a 8-10% return for the index now compared to before due to India being in much better shape after 1991.
Anon9001,

So, you gamble on a stock that had returned less than the index or not significantly better than the index. Even if you are right, you are not rewarded for your gamble. It is a lose-lose proposition. And, you believe that this is a good idea. What do I miss here?

KlangFool
This is a joke right? The ROE is depressed by the amount of cash it holds on balance sheet. If it gets rid of the debt funds and tax free bonds it goes to 40-50%. They could distribute it all of it as dividends. I wouldn't invest in this company if they didn't pay dividends due to the large cash they have relative to their balance sheet.
Just want to add one thing, why do you think CDSL has such large cash and cash equivalent position? Most high growth companies would rather spend the money (especially given the low interest environment) either in M&A or organic growth. Just food for thought.

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whodidntante
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Re: Concentration risk over-rated?

Post by whodidntante » Tue Jul 28, 2020 11:47 am

You're trying to convince Bogleheads to reject a deeply held belief. In my opinion you are not doing a good job supporting your thesis. You've been informed on a point of view different from your own. It's your money so invest it how you like. The forum does not need to be comfortable with the risks you take.

theorist
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Re: Concentration risk over-rated?

Post by theorist » Tue Jul 28, 2020 11:49 am

OP,

I am not sure the definition of quality is * exactly * the same, but there is a standard “quality factor” (based on balance sheet strength, earnings growth, etc.) in the factor investing literature. There are funds which invest in e.g. subsets of large cap stocks (or small cap stocks, or ...) based on cuts on high quality, by this metric. One example is here

https://www.morningstar.com/etfs/bats/qual/quote

Perhaps studying the returns of this factor can help make your notion more precise and quantitative.

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Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 12:27 pm

jarjarM wrote:
Tue Jul 28, 2020 11:46 am
Anon9001 wrote:
Tue Jul 28, 2020 11:35 am
KlangFool wrote:
Tue Jul 28, 2020 11:30 am
Anon9001 wrote:
Tue Jul 28, 2020 11:15 am
KlangFool wrote:
Tue Jul 28, 2020 11:05 am


Anon9001,

Better is not the answer that I am looking for.

What is the ROI for this stock? 10%? 20%? 30%?

What is the ROI of your index?

KlangFool
I haven't done ROI calculation for both but the ROE for the company is 13-16%. The index itself has given high returns of 15% in past but India was also much riskier in the past I would assume a 8-10% return for the index now compared to before due to India being in much better shape after 1991.
Anon9001,

So, you gamble on a stock that had returned less than the index or not significantly better than the index. Even if you are right, you are not rewarded for your gamble. It is a lose-lose proposition. And, you believe that this is a good idea. What do I miss here?

KlangFool
This is a joke right? The ROE is depressed by the amount of cash it holds on balance sheet. If it gets rid of the debt funds and tax free bonds it goes to 40-50%. They could distribute it all of it as dividends. I wouldn't invest in this company if they didn't pay dividends due to the large cash they have relative to their balance sheet.
Just want to add one thing, why do you think CDSL has such large cash and cash equivalent position? Most high growth companies would rather spend the money (especially given the low interest environment) either in M&A or organic growth. Just food for thought.
The low interest rate environment is not universal. The Indian debt instruments they have access to offer much higher interest rates than developed countries. The company itself can't do any M&A due to regulations and it has minimal capex requirements due to how capital light the business is. The parent owning CDSL is also having high cash although it is having much higher dividend yield than CDSL due to the parent stock being much more cyclical. I assume it is due to regulatory requirements. If you know about Indian stock market you need a demat account to purchase and hold stocks and other financial instruments. This is the company along with it's competitor where your financial assets are held regardless of what broker you go to. If they didn't have any huge cash reserves requirement I would expect the regulator to have gone mad.

Topic Author
Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 12:34 pm

KlangFool wrote:
Tue Jul 28, 2020 11:45 am
Anon9001 wrote:
Tue Jul 28, 2020 11:35 am

This is a joke right? The ROE is depressed by the amount of cash it holds on balance sheet. If it gets rid of the debt funds and tax free bonds it goes to 40-50%. They could distribute it all of it as dividends. I wouldn't invest in this company if they didn't pay dividends due to the large cash they have relative to their balance sheet.
Anon9001,

1) How long would you wait for this to happen?

2) Why would this matter? Let's assume that you are right and this stock return 50% over one year, why would this matter? This is for 10% of your portfolio. You gain 50% of 10% = 5% extra for your portfolio. Why does this matter?

I do not gamble on a stock unless it has the possibility of returning 10X to 30X.

KlangFool
1. Considering the local government scrapped the Dividend Distribution Tax I expect the dividends per share to increase. That was bad for the company as they had to pay tax not the individual that gets the dividend (Yes I know that was insane and India was the only country in World who done this tax as far as I know) if they issued a dividend even though they were already taxed on their earnings.

2. Amazon itself had a pretty mediocre ROE yet it was insane price appreciation. ROE does not fully explain return of stock:https://www.macrotrends.net/stocks/char ... amazon/roe

Topic Author
Anon9001
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Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 12:43 pm

whodidntante wrote:
Tue Jul 28, 2020 11:47 am
You're trying to convince Bogleheads to reject a deeply held belief. In my opinion you are not doing a good job supporting your thesis. You've been informed on a point of view different from your own. It's your money so invest it how you like. The forum does not need to be comfortable with the risks you take.
Cool personally it all depends on age. When you are younger you do need to take higher risks due to how little money you have relative to later in life. If I was having massive amounts of money I wouldn't even attempt this.

jarjarM
Posts: 155
Joined: Mon Jul 16, 2018 1:21 pm

Re: Concentration risk over-rated?

Post by jarjarM » Tue Jul 28, 2020 12:52 pm

Anon9001 wrote:
Tue Jul 28, 2020 12:27 pm
jarjarM wrote:
Tue Jul 28, 2020 11:46 am

Just want to add one thing, why do you think CDSL has such large cash and cash equivalent position? Most high growth companies would rather spend the money (especially given the low interest environment) either in M&A or organic growth. Just food for thought.
The low interest rate environment is not universal. The Indian debt instruments they have access to offer much higher interest rates than developed countries. The company itself can't do any M&A due to regulations and it has minimal capex requirements due to how capital light the business is. The parent owning CDSL is also having high cash although it is having much higher dividend yield than CDSL due to the parent stock being much more cyclical. I assume it is due to regulatory requirements. If you know about Indian stock market you need a demat account to purchase and hold stocks and other financial instruments. This is the company along with it's competitor where your financial assets are held regardless of what broker you go to. If they didn't have any huge cash reserves requirement I would expect the regulator to have gone mad.
I see, learn something new everyday. I did check the India interest rate environment and it looks like it's trending down but definitely higher than DMs. Given the inflation rate in India is also higher than DMs, it looks like the real return on those debt instruments are fairly marginal. It seems to me to be a bit of inefficient usage of capital but maybe that's the norm. I did found this bit on CDSL analysis and earning growth potential. I'm sure you done your study but just beware that if the PE is abnormally high compare to the market, there has to be a reason. Enjoy :beer

https://simplywall.st/stocks/in/diversi ... -earnings/

Topic Author
Anon9001
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Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 1:08 pm

jarjarM wrote:
Tue Jul 28, 2020 12:52 pm
Anon9001 wrote:
Tue Jul 28, 2020 12:27 pm
jarjarM wrote:
Tue Jul 28, 2020 11:46 am

Just want to add one thing, why do you think CDSL has such large cash and cash equivalent position? Most high growth companies would rather spend the money (especially given the low interest environment) either in M&A or organic growth. Just food for thought.
The low interest rate environment is not universal. The Indian debt instruments they have access to offer much higher interest rates than developed countries. The company itself can't do any M&A due to regulations and it has minimal capex requirements due to how capital light the business is. The parent owning CDSL is also having high cash although it is having much higher dividend yield than CDSL due to the parent stock being much more cyclical. I assume it is due to regulatory requirements. If you know about Indian stock market you need a demat account to purchase and hold stocks and other financial instruments. This is the company along with it's competitor where your financial assets are held regardless of what broker you go to. If they didn't have any huge cash reserves requirement I would expect the regulator to have gone mad.
I see, learn something new everyday. I did check the India interest rate environment and it looks like it's trending down but definitely higher than DMs. Given the inflation rate in India is also higher than DMs, it looks like the real return on those debt instruments are fairly marginal. It seems to me to be a bit of inefficient usage of capital but maybe that's the norm. I did found this bit on CDSL analysis and earning growth potential. I'm sure you done your study but just beware that if the PE is abnormally high compare to the market, there has to be a reason. Enjoy :beer

https://simplywall.st/stocks/in/diversi ... -earnings/
I bought it way back when it was trading at reasonable P/E's. If you don't believe me check out my post history. I will say the company is having a scarcity premium. The only other company like it which is listed in stock exchanges globally is a Peru company. India has much brighter prospects than Peru. The scarcity should lead it to trade at a premium. The growth prospects are exciting though. You wouldn't believe how little Indians invest in financial assets even when compared to developing countries. With the crackdown on black money and extra tax on Gold I expect this trend to speed up and this company is going to benefit from this. The other growth avenue is the fact that unlisted companies are now required to have their shares in electronic format. The amount of unlisted companies here is 80,000 for reference the number of listed companies is 7,800.

Chip
Posts: 3017
Joined: Wed Feb 21, 2007 4:57 am

Re: Concentration risk over-rated?

Post by Chip » Tue Jul 28, 2020 2:11 pm

Anon9001 wrote:
Tue Jul 28, 2020 10:46 am
The regression beta on CDSL also is 0.81276 when compared to NIFTY 500.
Beta to five decimal places. I'm thoroughly impressed.

Topic Author
Anon9001
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Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 2:18 pm

Chip wrote:
Tue Jul 28, 2020 2:11 pm
Anon9001 wrote:
Tue Jul 28, 2020 10:46 am
The regression beta on CDSL also is 0.81276 when compared to NIFTY 500.
Beta to five decimal places. I'm thoroughly impressed.
Heh it was Excel that came up with it. It was a chore to get the price data though.

Topic Author
Anon9001
Posts: 572
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 2:23 pm

Okay a more reliable test of this theory should be 50% NESTLE 50% SWISSCOM verses 100% Vanguard Ex-US International

These are three cycles. One tech bust. One financial collapse 2008. One pandemic 2020. The two stock portfolio is much less risky. More diversification does not do anything.

02nz
Posts: 5393
Joined: Wed Feb 21, 2018 3:17 pm

Re: Concentration risk over-rated?

Post by 02nz » Tue Jul 28, 2020 2:25 pm

Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Maybe you should ask some former Enron employees whether they think this risk is over-rated.

Topic Author
Anon9001
Posts: 572
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 2:34 pm

02nz wrote:
Tue Jul 28, 2020 2:25 pm
Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Maybe you should ask some former Enron employees whether they think this risk is over-rated.
This company is pretty essential though. If it goes bankrupt there goes trust in Indian stock market. To invest in Indian stock market you need to use this company's product "Demat Account". The money you put in a broker goes with this company and it's competitor always. There is a competitor to this company called NSDL and they target different customers. Also many companies store their shares and bonds in CDSL.

jarjarM
Posts: 155
Joined: Mon Jul 16, 2018 1:21 pm

Re: Concentration risk over-rated?

Post by jarjarM » Tue Jul 28, 2020 2:38 pm

02nz wrote:
Tue Jul 28, 2020 2:25 pm
Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Maybe you should ask some former Enron employees whether they think this risk is over-rated.
Or wirecard (who's even a component of the prestigious DAX30 index) or luckin coffee. When it's too good to be true, maybe it is. I don't think anyone here is saying that there isn't a stock out there that will beat the index, mathematically there will be few that beats the market over long term. However, the index methodology will reduce the risk of picking the wrong needle in the haystack. Also, in an efficient market, the price for even small cap company will price appropriately, but it does sound like your home market (India) is not efficient.

quantAndHold
Posts: 4816
Joined: Thu Sep 17, 2015 10:39 pm

Re: Concentration risk over-rated?

Post by quantAndHold » Tue Jul 28, 2020 2:40 pm

Ah, I remember being young and invincible. It was a great time to be alive.

My suggestion would be to ignore us for now since you're going to anyway, go forth, invest, and come back in five or ten years once you have a track record. Then come back and tell us what idiots we are. We'll still be here.
Yes, I’m really that pedantic.

02nz
Posts: 5393
Joined: Wed Feb 21, 2018 3:17 pm

Re: Concentration risk over-rated?

Post by 02nz » Tue Jul 28, 2020 2:47 pm

Anon9001 wrote:
Tue Jul 28, 2020 2:34 pm
02nz wrote:
Tue Jul 28, 2020 2:25 pm
Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
I myself bought significant amount of shares in a small cap company CDSL and it has fallen less than "Diversified" Index Nifty 500(Click YTD). I think we have confused risks about concentration. Sure if you invest randomly in 5-10 stocks like a monkey throwing darts you are having significant risks but if you invest in 5-10 quality stocks the risks are much less as shown in example and that is a small cap company that no-one has ever heard of outside niche stock picking forums.
Maybe you should ask some former Enron employees whether they think this risk is over-rated.
This company is pretty essential though. If it goes bankrupt there goes trust in Indian stock market. To invest in Indian stock market you need to use this company's product "Demat Account". The money you put in a broker goes with this company and it's competitor always. There is a competitor to this company called NSDL and they target different customers. Also many companies store their shares and bonds in CDSL.
Maybe you know more than the people who follow that company/sector for a living. Likely you don't.

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