Concentration risk over-rated?

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Anon9001
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Re: Concentration risk over-rated?

Post by Anon9001 » Tue Jul 28, 2020 2:49 pm

The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?

02nz
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Re: Concentration risk over-rated?

Post by 02nz » Tue Jul 28, 2020 2:49 pm

quantAndHold wrote:
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.
Yep, like the ones who (doing the inverse of what OP is proposing, but in a way still the same) shorted Tesla last year, certain that the stock would go down. Funny, they never come back to tell us how they're doing, no doubt because they're too busy spending the fortune they made on that short! :oops:

jarjarM
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Re: Concentration risk over-rated?

Post by jarjarM » Tue Jul 28, 2020 2:56 pm

Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Maybe because some of us have seen 150+ yr old investment banks with strong track record went down.
https://en.wikipedia.org/wiki/Lehman_Brothers

02nz
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Re: Concentration risk over-rated?

Post by 02nz » Tue Jul 28, 2020 3:02 pm

Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Again, what gives you such unique insight into this company and its prospects? If indeed you had such unique and actionable insight, you would not be posting about it on the internet and asking random strangers to validate. You'd already be running your own hedge fund. :happy

02nz
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Re: Concentration risk over-rated?

Post by 02nz » Tue Jul 28, 2020 3:05 pm

TheTimeLord wrote:
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.
+1 on the monkeys. :happy If stock-picking were as easy as finding the "high-quality" companies, then any human could do it. And yet most professional human stock-pickers do not beat the monkeys. And Vanguard's monkeys indexing operation charges way less than the stock-pickers.

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Re: Concentration risk over-rated?

Post by whodidntante » Tue Jul 28, 2020 3:35 pm

jarjarM wrote:
Tue Jul 28, 2020 2:56 pm
Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Maybe because some of us have seen 150+ yr old investment banks with strong track record went down.
https://en.wikipedia.org/wiki/Lehman_Brothers
I refer to the financial crisis as Hurricane Lehman.

jarjarM
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Re: Concentration risk over-rated?

Post by jarjarM » Tue Jul 28, 2020 3:42 pm

whodidntante wrote:
Tue Jul 28, 2020 3:35 pm
jarjarM wrote:
Tue Jul 28, 2020 2:56 pm
Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Maybe because some of us have seen 150+ yr old investment banks with strong track record went down.
https://en.wikipedia.org/wiki/Lehman_Brothers
I refer to the financial crisis as Hurricane Lehman.
:sharebeer

randomguy
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Re: Concentration risk over-rated?

Post by randomguy » Tue Jul 28, 2020 3:48 pm

Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Company was trading at 399 in July 2017. It was trading at 207 March 2020. Trading at 358 today. So your "safe stock" dropped 50% over a bit over 2.5 years and then had a big rally over the past 2 months. Does this really strike you as a safe stock or as a speculative stock? Can you tell me why the stock is worth so much more than in March 2020 or why people thought it was worth so little on March 2020?

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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 9:03 am

randomguy wrote:
Tue Jul 28, 2020 3:48 pm
Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Company was trading at 399 in July 2017. It was trading at 207 March 2020. Trading at 358 today. So your "safe stock" dropped 50% over a bit over 2.5 years and then had a big rally over the past 2 months. Does this really strike you as a safe stock or as a speculative stock? Can you tell me why the stock is worth so much more than in March 2020 or why people thought it was worth so little on March 2020?
I analyze the company. I don't look at the price charts as I am not trader. The company itself is very safe as all Indian companies regardless of whether they are listed or unlisted are required by law to put their shares and bonds in it along with it's competitor. Both charge the companies a fee annually for doing so. Also individuals are required to put their money in it along with it's competitor to buy shares and bonds directly regardless of which broker they go to. Majority of the companies assets is invested in debt instruments too and they are a zero debt company. The beta itself is very low also at 0.81 in respect to Index. Referring to the price movements stock itself has a very short price history. It was listed in 2017 just three years ago.

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Re: Concentration risk over-rated?

Post by nedsaid » Wed Jul 29, 2020 9:18 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.
There is a concentration risk in the S&P 500 and the US Total Stock Market Index but I don't know for certain how big that risk is. If you want to dilute the effect of the biggest stocks in the index, just simply couple it with a Value Index, a Small Value Index, or maybe a Small-Cap Index. I also wouldn't get to carried away with tilting away from the indexes. I have a Large Value tilt and a lesser Small Value tilt but I have gone about as far as I want to go. Don't overdo this.

In 1999, the S&P 500 and Total Stock Market had similar concentration and these indexes were essentially flat for about 12 years. The Value oriented funds had positive returns during those years and outperformed the broad indexes. The risk you run isn't disaster but that the S&P 500 and Total Stock Market could be flat for a while. If you have the long time horizon to wait these things out, I wouldn't give it another thought. I would also point out that since 2010, Value has been underperforming the broad indexes. These things tend to more or less even out over time.
Last edited by nedsaid on Wed Jul 29, 2020 9:24 am, edited 1 time in total.
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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 9:21 am

nedsaid wrote:
Wed Jul 29, 2020 9:18 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.
There is a concentration risk in the S&P 500 and the US Total Stock Market Index but I don't know for certain how big that risk is. If you want to dilute the effect of the biggest stocks in the index, just simply couple it with a Value Index, a Small Value Index, or maybe a Small-Cap Index. I also wouldn't get to carried away with tilting away from the indexes. I have a Large Value tilt and a lesser Small Value tilt but I have gone about as far as I want to go. Don't overdo this.

In 1999, the S&P 500 and Total Stock Market had similar concentration and these indexes were essentially flat for about 12 years. The Value oriented funds had positive returns during those years and outperformed the broad indexes. The risk you run isn't disaster but that the S&P 500 and Total Stock Market could be flat for a while. If you have the long time horizon to wait these things out, I wouldn't give it another thought.
I am fairly confused why these indexes contain 500 stocks yet only 30-50 of them matter. Is there any reason to do this? Stock 499 would have 0.0005% compared to 5-10% weight of Stock 1. The moves in Stock 1 would move the index more than Stock 499 yet the index contains Stock 499 for no reason.

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Re: Concentration risk over-rated?

Post by nisiprius » Wed Jul 29, 2020 9:51 am

As an example of concentration risk, I pointed to a fund praised by Warren Buffett in "The Superinvestors of Graham and Doddsville" (though no longer managed by the same "superinvestor"), which invests in no more than a couple of dozen stocks, and went from a Morningstar five-star rating to a Morningstar one-star rating within less than a year due to excessive concentration in a single stock. Your response was
Anon9001 wrote:
Tue Jul 28, 2020 11:31 am
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.
Let's analyze this.

There is no such thing as risk to a person with a functioning crystal ball. If you have perfect foresight, then risk simply does not exist for you. Not concentration risk. Not any kind of risk.

You seem to be saying that the Sequoia Fund was not an example of concentration risk because you, personally, would not have concentrated your holdings into that particular stock.

To put it another way, you are saying that concentration risk does not exist for you because you can see the future better than the professionals at Sequoia can.

Are you trying to convince me to change my indexing ways? Concentration risk may not exist for you, but it exists for me and most of us. To put it less kindly, you believe that concentration risk does not exist for you, because you believe you can identify almost-risk-free stocks. But, since I do not believe that I can see the future better than professional managers of $20 billion mutual funds, I believe that concentration risk darn well does exist--for me. I think I'm taking less risk in the Vanguard Total Stock Market Index Fund (3,531) than I would be taking in an aggressively-managed, officially "non-diversified" fund like Oakmark (52) or Sequoia (24 stocks). And much more than I would be taking by choosing five stocks myself and phoning into Jim Cramer's program and asking him whether I am "diversified."

So I don't see where you are going with this, unless you just want to explain that concentration risk does not exist for you, because of your individual ability to identify almost-risk-free stocks.
Last edited by nisiprius on Wed Jul 29, 2020 9:59 am, edited 3 times in total.
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Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 9:56 am

OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.

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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 10:44 am

wackerdr wrote:
Wed Jul 29, 2020 9:56 am
OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.
Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.

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Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 10:46 am

Anon9001 wrote:
Wed Jul 29, 2020 10:44 am
wackerdr wrote:
Wed Jul 29, 2020 9:56 am
OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.
Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.
You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.

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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 11:07 am

nisiprius wrote:
Wed Jul 29, 2020 9:51 am
As an example of concentration risk, I pointed to a fund praised by Warren Buffett in "The Superinvestors of Graham and Doddsville" (though no longer managed by the same "superinvestor"), which invests in no more than a couple of dozen stocks, and went from a Morningstar five-star rating to a Morningstar one-star rating within less than a year due to excessive concentration in a single stock. Your response was
Anon9001 wrote:
Tue Jul 28, 2020 11:31 am
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.
Let's analyze this.

There is no such thing as risk to a person with a functioning crystal ball. If you have perfect foresight, then risk simply does not exist for you. Not concentration risk. Not any kind of risk.

You seem to be saying that the Sequoia Fund was not an example of concentration risk because you, personally, would not have concentrated your holdings into that particular stock.

To put it another way, you are saying that concentration risk does not exist for you because you can see the future better than the professionals at Sequoia can.

Are you trying to convince me to change my indexing ways? Concentration risk may not exist for you, but it exists for me and most of us. To put it less kindly, you believe that concentration risk does not exist for you, because you believe you can identify almost-risk-free stocks. But, since I do not believe that I can see the future better than professional managers of $20 billion mutual funds, I believe that concentration risk darn well does exist--for me. I think I'm taking less risk in the Vanguard Total Stock Market Index Fund (3,531) than I would be taking in an aggressively-managed, officially "non-diversified" fund like Oakmark (52) or Sequoia (24 stocks). And much more than I would be taking by choosing five stocks myself and phoning into Jim Cramer's program and asking him whether I am "diversified."

So I don't see where you are going with this, unless you just want to explain that concentration risk does not exist for you, because of your individual ability to identify almost-risk-free stocks.
No. Concentration risk is fine with me considering my age but for you and others it might not be suitable. Index funds are perfectly fine for people who don't want to do in depth research of companies and find out which one is quality or not. I myself have lots of free time so I do the effort to in depth research despite knowing the odds are stacked against me. I find it interesting hobby.

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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 11:09 am

wackerdr wrote:
Wed Jul 29, 2020 10:46 am
Anon9001 wrote:
Wed Jul 29, 2020 10:44 am
wackerdr wrote:
Wed Jul 29, 2020 9:56 am
OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.
Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.
You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.
To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
Last edited by Anon9001 on Wed Jul 29, 2020 11:17 am, edited 1 time in total.

02nz
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Re: Concentration risk over-rated?

Post by 02nz » Wed Jul 29, 2020 11:17 am

Anon9001 wrote:
Wed Jul 29, 2020 11:07 am
No. Concentration risk is fine with me considering my age but for you and others it might not be suitable. Index funds are perfectly fine for people who don't want to do in depth research of companies and find out which one is quality or not. I myself have lots of free time so I do the effort to in depth research despite knowing the odds are stacked against me. I find it interesting hobby.
Fine, just know that the people you're trading against have research, data, experience, knowledge, connections, and many other tools at their disposal that you can't even imagine. Good luck - you'll need a lot of it. And do come back to tell us how you did. :moneybag

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Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 11:19 am

02nz wrote:
Wed Jul 29, 2020 11:17 am
Anon9001 wrote:
Wed Jul 29, 2020 11:07 am
No. Concentration risk is fine with me considering my age but for you and others it might not be suitable. Index funds are perfectly fine for people who don't want to do in depth research of companies and find out which one is quality or not. I myself have lots of free time so I do the effort to in depth research despite knowing the odds are stacked against me. I find it interesting hobby.
Fine, just know that the people you're trading against have research, data, experience, knowledge, connections, and many other tools at their disposal that you can't even imagine. Good luck - you'll need a lot of it. And do come back to tell us how you did. :moneybag
I think you are over-estimating the people who are owning and trading small cap companies. They are not institutions. The liquidity is too low for them to influence things. I would think it is fair challenge. If I was doing this in large cap area I would agree however.

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Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 11:25 am

Anon9001 wrote:
Wed Jul 29, 2020 11:09 am
wackerdr wrote:
Wed Jul 29, 2020 10:46 am
Anon9001 wrote:
Wed Jul 29, 2020 10:44 am
wackerdr wrote:
Wed Jul 29, 2020 9:56 am
OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.
Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.
You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.
To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.

Topic Author
Anon9001
Posts: 593
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 11:39 am

wackerdr wrote:
Wed Jul 29, 2020 11:25 am
Anon9001 wrote:
Wed Jul 29, 2020 11:09 am
wackerdr wrote:
Wed Jul 29, 2020 10:46 am
Anon9001 wrote:
Wed Jul 29, 2020 10:44 am
wackerdr wrote:
Wed Jul 29, 2020 9:56 am
OP,

I am familiar with Indian markets, and still have about 100K in the India market. CDSL is certainly in a unique position as far as Indian market is concerned, and given its quasi-government nature, there is not a lot of downside risk over long term.

To you other points: it is also true that there is a return drag by low performers in an index fund.

But none of that negates this: It is more than a full time job to keep track of fundamental analysis for a small cap ones or even mid cap ones. They are far more susceptible to macro and micro variables. A strong balance sheet position is just not enough to counter external threats over long term. Fundamental analysis may be worth your time for a large cap or megacap , so that you can build a well diversified portfolio that covers all the industry verticals. More importantly, you dont have to watch every quarter financial results. Even if you don't care about stock price movements, as a fundamental analyst, you better read the quarterly statements and earning call transcripts, if you hold small/mid cap. For large and mega cap stocks, it is probably ok to follow macro economic trends and do a deep dive only occasionally.

Even If you want to play risk game, there are far better ways. Leveraging is the most effective, and least time consuming. I am long on TQQQ+TMF combo. In general passive investing is the way to go, even when you are young. If you have time, my 2 cents would be to invest your time in increasing income, add a side hustle, whatever to diverse your income stream, than spending a lot of time on fundamental analysis.

Added later: If you are based in India, I strong suggest you take a look at Franklin Templeton Equity Mutual funds. Indian market is lot less efficient than US. It is shallow as well. There is an considerable difference in return between NIFTY returns and active managed fund returns. An active mutual fund could be an appropriate risk/reward, in my opinion.
Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.
You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.
To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.
I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.

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

Re: Concentration risk over-rated?

Post by KlangFool » Wed Jul 29, 2020 11:42 am

Anon9001 wrote:
Wed Jul 29, 2020 11:39 am

I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
Anon9001,

How do you plan to make money from this stock?

A) Buy at X, Sell at X+Y%?

B) Collect the Z% dividend every year?

C) How long do you plan to wait for (A) or (B)?

D) How do you know if you are wrong about this stock? Stock price drop to ?? Or the stock stop paying dividends?

KlangFool

wackerdr
Posts: 95
Joined: Mon Jun 08, 2020 3:53 pm

Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 11:46 am

Anon9001 wrote:
Wed Jul 29, 2020 11:39 am
wackerdr wrote:
Wed Jul 29, 2020 11:25 am
Anon9001 wrote:
Wed Jul 29, 2020 11:09 am
wackerdr wrote:
Wed Jul 29, 2020 10:46 am
Anon9001 wrote:
Wed Jul 29, 2020 10:44 am

Yeah Franklin itself had big controversy lately. I think you missed it. The bright people there :oops: invested in junk bonds which had poor liquidity in Indian debt market and had no restrictions on redemption from their fund. It was a ticking time bomb and I am confused what the fund manager had to gain from allowing people to redeem whenever they want verses restricting redemption to ensure that the fund did not have sell the junk bonds below face value due to lack of liquidity. I agree with you about active funds although I would say it depends what fund you buy. If it is large cap fund there would be no alpha due to restrictions on large cap schemes (ie they can only invest in NIFTY 100 companies and not take midcap and smallcap exposure for 80% of scheme).

CDSL itself is having so much cash that I don't worry too much about it. If it goes bankrupt that would mean lot of companies shares,debentures and bonds would be gone too. Much different from ordinary small-cap.
You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.
To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.
I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
No company is immune from funky things. Karvy is in similar business. I am sure you are aware.

For those that are not aware, Karvy is a major stock broker India - somewhat loosely equivalent to Fidelity/Vanguard/Schwab on the trading side. Investors give power of attorney as a part of service agreement. Karvy turned around and misused that Power of Attorney to pledge the stocks owned by individual investors, and raised money.

Of course it is your money, and you are free to do what you want to do with it.
Last edited by wackerdr on Wed Jul 29, 2020 11:57 am, edited 1 time in total.

Topic Author
Anon9001
Posts: 593
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 11:56 am

wackerdr wrote:
Wed Jul 29, 2020 11:46 am
Anon9001 wrote:
Wed Jul 29, 2020 11:39 am
wackerdr wrote:
Wed Jul 29, 2020 11:25 am
Anon9001 wrote:
Wed Jul 29, 2020 11:09 am
wackerdr wrote:
Wed Jul 29, 2020 10:46 am


You seem to be aware of the market and the risks. Good luck.

Added later: I am aware of the debt side story of the Franklin debt funds. I specifically mentioned about equity funds. I admit,I have not kept track of equity funds performance recently. I exited those because of Passive Foreign Income issues for US based investors.
To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.
I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
No company is immune from funky things. Karvy is in similar business. I am sure you are aware.
Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.

wackerdr
Posts: 95
Joined: Mon Jun 08, 2020 3:53 pm

Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 11:59 am

Anon9001 wrote:
Wed Jul 29, 2020 11:56 am
wackerdr wrote:
Wed Jul 29, 2020 11:46 am
Anon9001 wrote:
Wed Jul 29, 2020 11:39 am
wackerdr wrote:
Wed Jul 29, 2020 11:25 am
Anon9001 wrote:
Wed Jul 29, 2020 11:09 am

To clarify I myself would not trust the AMC knowing what they done with their debt funds.

Source if anyone doesn't know:http://mfcritic.blogspot.com/2020/04/ag ... estor.html
OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.
I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
No company is immune from funky things. Karvy is in similar business. I am sure you are aware.
Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.
As I said, I don't mean to convince you. The larger point is, funky things can happen with any company. No guarantee that CDSL will be immune from that. Hence the concentration risk. But like I said, it is your money.

Topic Author
Anon9001
Posts: 593
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 12:03 pm

wackerdr wrote:
Wed Jul 29, 2020 11:59 am
Anon9001 wrote:
Wed Jul 29, 2020 11:56 am
wackerdr wrote:
Wed Jul 29, 2020 11:46 am
Anon9001 wrote:
Wed Jul 29, 2020 11:39 am
wackerdr wrote:
Wed Jul 29, 2020 11:25 am


OP,
I know this may not change your mind, but I invested a pretty sum between 2012 and 2019, in personalized, equity researched portfolio of small caps in India. I was actively reviewing and okaying the investment recommendations. It was a HNW service from a boutique equity research house. Suffice to say it didn't end well for me. YMMV.

IMHO, Indian market is not mature enough to ensure a fair play for small caps. The macro risks are amplified in India with too much of impact of government policy on private (or listed) companies, crony capitalism, insider information and political interference.
I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
No company is immune from funky things. Karvy is in similar business. I am sure you are aware.
Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.
As I said, I don't mean to convince you. The larger point is, funky things can happen with any company. No guarantee that CDSL will be immune from that. Hence the concentration risk. But like I said, it is your money.
That's true but you do know how the concentrated the indexes here are right? The Nifty 500 has 40% in 10 stocks. You are not getting significant protection if one company fails in a index. You just need to look under the hood:https://www.valueresearchonline.com/fun ... gular-plan (Scroll Down until See "Portfolio"). Of course you could argue these are big companies but the companies that entered Nifty 50 like Yes Bank still ended up going bankrupt.

wackerdr
Posts: 95
Joined: Mon Jun 08, 2020 3:53 pm

Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 12:05 pm

Anon9001 wrote:
Wed Jul 29, 2020 12:03 pm
wackerdr wrote:
Wed Jul 29, 2020 11:59 am
Anon9001 wrote:
Wed Jul 29, 2020 11:56 am
wackerdr wrote:
Wed Jul 29, 2020 11:46 am
Anon9001 wrote:
Wed Jul 29, 2020 11:39 am

I am taking risk management by limiting the position size to 10% with allowance for up to 20%. I am not betting 50% of money on this company. There are risks that black swan happens with management doing shady things but I see it as low enough. Your risk preferences would make you think I was crazy but we all have different risk tolerances. It is important to understand what is risky for one person would not be risky for another person. For me leveraging Nifty 500 would be extremely dumb idea but for you leverageing Nasdaq is smart idea. If I lived in a low interest rate country like yours I might change my mind on leverage as the price you pay for leverage is much less compared to me.
No company is immune from funky things. Karvy is in similar business. I am sure you are aware.
Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.
As I said, I don't mean to convince you. The larger point is, funky things can happen with any company. No guarantee that CDSL will be immune from that. Hence the concentration risk. But like I said, it is your money.
That's true but you do know how the concentrated the indexes here are right? The Nifty 500 has 40% in 10 stocks. You are not getting significant protection if one company fails in a index. You just need to look under the hood:https://www.valueresearchonline.com/fun ... gular-plan (Scroll Down until See "Portfolio"). Of course you could argue these are big companies but the companies that entered Nifty 50 like Yes Bank still ended up going bankrupt.
You are actually making a case for , why you shouldn't invest in a single company, regardless of how big it is. Yes Bank is a great example of that.

Topic Author
Anon9001
Posts: 593
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Concentration risk over-rated?

Post by Anon9001 » Wed Jul 29, 2020 12:18 pm

wackerdr wrote:
Wed Jul 29, 2020 12:05 pm
Anon9001 wrote:
Wed Jul 29, 2020 12:03 pm
wackerdr wrote:
Wed Jul 29, 2020 11:59 am
Anon9001 wrote:
Wed Jul 29, 2020 11:56 am
wackerdr wrote:
Wed Jul 29, 2020 11:46 am


No company is immune from funky things. Karvy is in similar business. I am sure you are aware.
Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.
As I said, I don't mean to convince you. The larger point is, funky things can happen with any company. No guarantee that CDSL will be immune from that. Hence the concentration risk. But like I said, it is your money.
That's true but you do know how the concentrated the indexes here are right? The Nifty 500 has 40% in 10 stocks. You are not getting significant protection if one company fails in a index. You just need to look under the hood:https://www.valueresearchonline.com/fun ... gular-plan (Scroll Down until See "Portfolio"). Of course you could argue these are big companies but the companies that entered Nifty 50 like Yes Bank still ended up going bankrupt.
You are actually making a case for , why you shouldn't invest in a single company, regardless of how big it is. Yes Bank is a great example of that.
If you want to get risk free environment you have to go to 100% bonds. 100% stocks no matter how well diversified geographically sector and stock wise will still have a risk that your money can go down by 50%. I myself am skeptical on the diversification practiced here where owning 100% in 9,000 stocks is diversification and owning Gold is shunned even though it is better diversifier than owning International Equities no matter where you are living.

wackerdr
Posts: 95
Joined: Mon Jun 08, 2020 3:53 pm

Re: Concentration risk over-rated?

Post by wackerdr » Wed Jul 29, 2020 12:24 pm

Anon9001 wrote:
Wed Jul 29, 2020 12:18 pm
wackerdr wrote:
Wed Jul 29, 2020 12:05 pm
Anon9001 wrote:
Wed Jul 29, 2020 12:03 pm
wackerdr wrote:
Wed Jul 29, 2020 11:59 am
Anon9001 wrote:
Wed Jul 29, 2020 11:56 am

Karvy RTA and Karvy Scam Company is not same:https://www.valueresearchonline.com/sto ... -fund-rta/

It is important to make the distinction between the two. The RTA is owned by General Atlantic not Karvy Group.
As I said, I don't mean to convince you. The larger point is, funky things can happen with any company. No guarantee that CDSL will be immune from that. Hence the concentration risk. But like I said, it is your money.
That's true but you do know how the concentrated the indexes here are right? The Nifty 500 has 40% in 10 stocks. You are not getting significant protection if one company fails in a index. You just need to look under the hood:https://www.valueresearchonline.com/fun ... gular-plan (Scroll Down until See "Portfolio"). Of course you could argue these are big companies but the companies that entered Nifty 50 like Yes Bank still ended up going bankrupt.
You are actually making a case for , why you shouldn't invest in a single company, regardless of how big it is. Yes Bank is a great example of that.
If you want to get risk free environment you have to go to 100% bonds. 100% stocks no matter how well diversified geographically sector and stock wise will still have a risk that your money can go down by 50%. I myself am skeptical on the diversification practiced here where owning 100% in 9,000 stocks is diversification and owning Gold is shunned even though it is better diversifier than owning International Equities no matter where you are living.
I get a feeling we are going in circles, and we can agree to disagree. My 2 cents is - all outcomes are possible with your stock pick - Spectacular performance, middling one, under performance or even getting embroiled in a scam. So long as you internalized the risks and more importantly, it is the money you don't mind losing, you should go for it. That would be my criteria. Your criteria and expectations may vary.

Coming back to original question: Is concentration risk over-rated? I think not, If I am investing only in 1 stock. If I am investing in a bunch of companies that overall represent a well diversified portfolio, the risk is no-longer concentrated.
Last edited by wackerdr on Wed Jul 29, 2020 1:54 pm, edited 1 time in total.

randomguy
Posts: 9142
Joined: Wed Sep 17, 2014 9:00 am

Re: Concentration risk over-rated?

Post by randomguy » Wed Jul 29, 2020 12:45 pm

Anon9001 wrote:
Wed Jul 29, 2020 9:03 am
randomguy wrote:
Tue Jul 28, 2020 3:48 pm
Anon9001 wrote:
Tue Jul 28, 2020 2:49 pm
The company and it's competitor is basically a bank for financial assets like shares and bonds except they don't pay money for holding these assets for their clients but rather charge their clients money annually. I am sorry if people are confused about it. It's low risk is due to this nature. What I am confused by is why you should own Nifty 500 when such a safe company is available to buy?
Company was trading at 399 in July 2017. It was trading at 207 March 2020. Trading at 358 today. So your "safe stock" dropped 50% over a bit over 2.5 years and then had a big rally over the past 2 months. Does this really strike you as a safe stock or as a speculative stock? Can you tell me why the stock is worth so much more than in March 2020 or why people thought it was worth so little on March 2020?
I analyze the company. I don't look at the price charts as I am not trader. The company itself is very safe as all Indian companies regardless of whether they are listed or unlisted are required by law to put their shares and bonds in it along with it's competitor. Both charge the companies a fee annually for doing so. Also individuals are required to put their money in it along with it's competitor to buy shares and bonds directly regardless of which broker they go to. Majority of the companies assets is invested in debt instruments too and they are a zero debt company. The beta itself is very low also at 0.81 in respect to Index. Referring to the price movements stock itself has a very short price history. It was listed in 2017 just three years ago.
Sure thats all true. And still your "Safe" stock is off 10%, had a 50% loss, and like a 70% gain. I think we have vastly different definitions of safe:)

02nz
Posts: 5425
Joined: Wed Feb 21, 2018 3:17 pm

Re: Concentration risk over-rated?

Post by 02nz » Wed Jul 29, 2020 2:18 pm

Anon9001 wrote:
Wed Jul 29, 2020 12:18 pm
If you want to get risk free environment you have to go to 100% bonds. 100% stocks no matter how well diversified geographically sector and stock wise will still have a risk that your money can go down by 50%. I myself am skeptical on the diversification practiced here where owning 100% in 9,000 stocks is diversification and owning Gold is shunned even though it is better diversifier than owning International Equities no matter where you are living.
Stocks can go down by more than 50%. And 100% bonds isn't risk-free. There are many different kinds of risk. But ok, you've decided that your approach works for you. Good luck.

LFS1234
Posts: 184
Joined: Fri Feb 08, 2019 4:13 am

Re: Concentration risk over-rated?

Post by LFS1234 » Wed Jul 29, 2020 4:14 pm

Anon9001 wrote:
Wed Jul 29, 2020 11:07 am
I myself have lots of free time so I do the effort to in depth research despite knowing the odds are stacked against me. I find it interesting hobby.
Why do you believe the odds are stacked against you? A pure Boglehead who has managed to eliminate all investment expenses can expect market returns; no more and no less. Everyone else will do either better or worse. By eliminating certain bad behaviors (high expenses, mindless momentum trading, tax-inefficient actions) you can reduce your odds of being in the "worse" category. In such case, and if you have the ability to do at least some rational analysis (which you clearly do), it would be reasonable to expect that your results will be somewhere between slightly below average and somewhat above average. Furthermore, with time and experience, you may further improve your skills and, consequently, your results.

Warren Buffett has said that investors (he's addressing the small minority of people with actual investing prowess, not the vast majority for whom he recommends index funds) would be much better off if they had a lifetime limit of making 20 investments. (google: "Buffett 20 investment punchcard") This would force them to think very long-term and to be very selective. He and most other highly accomplished investors believe in limited diversification. Most of these would agree that a portfolio of ten-stocks, well-selected, would constitute adequate diversification.

Investing is an interesting hobby, albeit a time-consuming one. You could spend your time worse. If/when you no longer enjoy it or have the time for it, or if your investment results are unsatisfactory, you can always convert to a partial- or full Boglehead philosophy later. If you're young and without major responsibilities to others, you have the luxury of experimentation.

If you've never read Peter Lynch's "One Up on Wall Street", you might enjoy it. He does a good job explaining some of the very real advantages that individual investors have over professionals. One of these is that individuals never have to buy unless they are happy with price, while professionals have to buy when they have money to invest - and the professionals tend to have the most money to invest at exactly the wrong times, when the public gets carried away and overwhelms them with money. The dotcom frenzy of the late 1990s is a prime example of this, where fund after fund was set up, in response to insatiable public demand, for the sole purpose of buying tech stocks at absurdly high prices.

In doing post-mortems on those of my stock transactions which turned into large losses over the past 40 years, I've found that these often involved stocks that I bought primarily because they were popular with other investors. Enron and Worldcom come to mind. The stocks that worked out particularly well for me were often stocks in companies that I learned about through some path other than having heard about them from other investors - for example, by running into their products through work. My takeaway: be particularly careful with companies that you hear about from investment-related sources. They're not always bad investments, but they are more likely to be fully-priced or over-priced due to heightened investor interest.

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Re: Concentration risk over-rated?

Post by whodidntante » Wed Jul 29, 2020 4:26 pm

I just had a flashback to an episode in the first season of Family Ties, where Alex P. Keaton invests his dad's money in a can't lose company in the Philippines. Am I the only one who remembers that episode?

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Re: Concentration risk over-rated?

Post by 000 » Wed Jul 29, 2020 5:28 pm

Anon9001,

We don't know what all the risks are until they happen. Can you tell me the probability that CDSL loses its quasi-monopoly status over the next 20 years?

I suggest reading up on Fannie Mae / Freddie Mac investors.

Whatever you decide, please come back in the future and let us know how it goes.

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Re: Concentration risk over-rated?

Post by abuss368 » Wed Jul 29, 2020 5:57 pm

May just need a different message board!
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Re: Concentration risk over-rated?

Post by LFS1234 » Wed Jul 29, 2020 8:25 pm

whodidntante wrote:
Wed Jul 29, 2020 4:26 pm
I just had a flashback to an episode in the first season of Family Ties, where Alex P. Keaton invests his dad's money in a can't lose company in the Philippines. Am I the only one who remembers that episode?
I saw that episode 37 years ago when it first came out. It left an impression. The three takeaways: don't put all your eggs in one basket, don't use margin, and there always is a possibility of a negative outcome regardless of how sure you feel about something.

I did not recall that the stock in question was a Philippine one. If you could recall that level of detail, you have a fantastic memory.

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Re: Concentration risk over-rated?

Post by arcticpineapplecorp. » Wed Jul 29, 2020 9:05 pm

whodidntante wrote:
Wed Jul 29, 2020 4:26 pm
I just had a flashback to an episode in the first season of Family Ties, where Alex P. Keaton invests his dad's money in a can't lose company in the Philippines. Am I the only one who remembers that episode?
don't remember it, but would love to see it. looked it up. it's called "Margin of Error". Get it?
Alex has a school project picking stocks. Seeing that he's losing money by not investing, without his father's knowledge, Alex invests Steven's money in a stock (Video Industries of the Philippines) that crashes due to a typhoon in Manila. This leaves his father owing $2700. Alex tries to talk to the broker (played by Philip Charles MacKenzie) but he's not able to help. Alex finally tells his parents the truth.

source: https://familyties.fandom.com/wiki/Margin_of_Error
ah the ol' stock picking game. the public school's biggest push towards legalized gambling. really wish teachers would stop teaching our children to gamble with their life savings when it's just not necessary.

fantastic memory indeed whodidntante.
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Re: Concentration risk over-rated?

Post by whodidntante » Wed Jul 29, 2020 9:11 pm

LFS1234 wrote:
Wed Jul 29, 2020 8:25 pm
whodidntante wrote:
Wed Jul 29, 2020 4:26 pm
I just had a flashback to an episode in the first season of Family Ties, where Alex P. Keaton invests his dad's money in a can't lose company in the Philippines. Am I the only one who remembers that episode?
I saw that episode 37 years ago when it first came out. It left an impression. The three takeaways: don't put all your eggs in one basket, don't use margin, and there always is a possibility of a negative outcome regardless of how sure you feel about something.

I did not recall that the stock in question was a Philippine one. If you could recall that level of detail, you have a fantastic memory.
It did seem pertinent. Glad to know I'm not the only one who remembers that. :happy

Having a good memory also means I can remember with horrifying clarity many of the things I have done wrong. :oops:

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Re: Concentration risk over-rated?

Post by Schlabba » Thu Jul 30, 2020 12:46 am

LFS1234 wrote:
Wed Jul 29, 2020 4:14 pm
Anon9001 wrote:
Wed Jul 29, 2020 11:07 am
I myself have lots of free time so I do the effort to in depth research despite knowing the odds are stacked against me. I find it interesting hobby.
...
In such case, and if you have the ability to do at least some rational analysis (which you clearly do), it would be reasonable to expect that your results will be somewhere between slightly below average and somewhat above average.
...
The stock market has a large skewedness. There are only a few stocks which contribute greatly to the total return, some stocks are above average and most stocks underperform the index!

There is some data that even says that only 4% of the stocks in the market are responsible for the majority of the results. (Will have to look it up later).

If you take a small subset of the market your chances of underperforming are much larger than outperforming the index. That is before cost/tax come into play.
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Re: Concentration risk over-rated?

Post by Anon9001 » Thu Jul 30, 2020 7:07 am

Long term holding is very important. I will report back after 5 years on this. Right now it's been 4 months. Too young to say anything. Just look at the price chart of this to track my performance:https://www.google.com/search?q=cdsl+st ... e&ie=UTF-8

I bought at 190-224. Very lucky. Will see if luck continues.

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Re: Concentration risk over-rated?

Post by nisiprius » Thu Jul 30, 2020 8:17 am

Anon9001 wrote:
Thu Jul 30, 2020 7:07 am
Long term holding is very important. I will report back after 5 years on this. Right now it's been 4 months. Too young to say anything. Just look at the price chart of this to track my performance:https://www.google.com/search?q=cdsl+st ... e&ie=UTF-8

I bought at 190-224. Very lucky. Will see if luck continues.
Try to find and use charts that include the effect of reinvested dividends, as they are important in long-term holdings and become more important with time. I am not a dividend fan but you are handicapping dividend stocks if you ignore their dividends. CDSL apparently pays dividends and looks better if you include them.

On a price chart for CDSL, we see that

an investor who donated all his dividends to charity
would be 351.25/399.90 - 1 = -12.2% below the 7/14/2017 peak, but

a growth chart shows that an investor who kept and reinvested them would be
13884.47/15286.70 - 1 = only -9.2% down from the peak.

Image

On these Morningstar charts, which unfortunately are "undocumented" but you can just change the ticker symbol in the link I provided, you can read out month by month numbers by sliding the cursor back and forth, which is what I did.
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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Re: Concentration risk over-rated?

Post by LFS1234 » Thu Jul 30, 2020 9:13 am

Schlabba wrote:
Thu Jul 30, 2020 12:46 am

The stock market has a large skewedness. There are only a few stocks which contribute greatly to the total return, some stocks are above average and most stocks underperform the index!

There is some data that even says that only 4% of the stocks in the market are responsible for the majority of the results. (Will have to look it up later).

If you take a small subset of the market your chances of underperforming are much larger than outperforming the index. That is before cost/tax come into play.
You are probably referring to Hendrik Bessembinder's paper "Do Stocks Outperform Treasury Bills?"

https://www.universal-investment.com/me ... ry%20Bills

It is an interesting and worthwhile read, but it makes unrealistic assumptions and has to be read critically. The conclusions served up by the popular press should be read even more critically.

The Bessembinder paper assumes that all dividends always are reinvested in the stocks that paid the dividends, and that no dividends ever are kept or spent otherwise by the shareholders. The necessary result of this assumption is that any company that ever goes bankrupt is considered to be a total failure, regardless of how much it distributed in dividends during its lifetime, because all of those dividends were assumed to have been reinvested in the failed stock. This is not a realistic assumption.

Bessembinder implicitly recognizes this in page 27 of his paper:

"Consider, as a case in point, General Motors Corporation (GM), which delisted in June
2009 following a Chapter 11 bankruptcy filing. The delisting share price for its main class of
common stock was $0.61, compared to $93 less than a decade earlier. Had the delisting share
price been zero instead of sixty one cents, GM’s lifetime buy-and-hold return would have been
-100%
. However, GM paid more than $64 billion in dividends to its shareholders in the decades
prior to its bankruptcy and also repurchased shares on multiple occasions, and these funds were
collectively available to investors for other purposes even after GM’s bankruptcy filing."


The paper also points out that rates of underperformance are highest for small capitalization stocks and for stocks that have entered the database in recent decades. Small-cap stocks and recent IPOs can easily be avoided until they have an acceptable track record and financials that are consistent with their pricing.

A traditional conservative stock portfolio is typically constituted of 10 - 30 stocks, typically dividend-paying, and all vetted for having both a track record and financial soundness. These dividends are either spent by the portfolio-owner, or reinvested in a way that is consistent with diversification. This approach should be just as viable today as it has been for previous generations.

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Re: Concentration risk over-rated?

Post by randomguy » Thu Jul 30, 2020 1:53 pm

LFS1234 wrote:
Thu Jul 30, 2020 9:13 am

The paper also points out that rates of underperformance are highest for small capitalization stocks and for stocks that have entered the database in recent decades. Small-cap stocks and recent IPOs can easily be avoided until they have an acceptable track record and financials that are consistent with their pricing.

A traditional conservative stock portfolio is typically constituted of 10 - 30 stocks, typically dividend-paying, and all vetted for having both a track record and financial soundness. These dividends are either spent by the portfolio-owner, or reinvested in a way that is consistent with diversification. This approach should be just as viable today as it has been for previous generations.
Yeah the part that gets ignored a lot is that nobody is really suggesting picking 15 stocks at random from a universe of 4000 or so that make up total market. It is picking 15-20 stocks from the 500 stocks that have survived to make it into the S&P 500 and then spreading them out across sectors. Yes you can still run into risks (you hold apple and alphabet and microsoft and facebook are the winners over the next 10 years). Most people would also suggest some pruning and rebalancing along the way.

If I had to only hold 20 stocks, I woud be comfortable with that. But why on earth would anyone do that with cheap ETFs? You need special circumstances. Or a belief that you can do a better job picking stocks than the people who do it 24/7.

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Re: Concentration risk over-rated?

Post by Schlabba » Fri Jul 31, 2020 3:37 am

LFS1234 wrote:
Thu Jul 30, 2020 9:13 am
Schlabba wrote:
Thu Jul 30, 2020 12:46 am

The stock market has a large skewedness. There are only a few stocks which contribute greatly to the total return, some stocks are above average and most stocks underperform the index!

There is some data that even says that only 4% of the stocks in the market are responsible for the majority of the results. (Will have to look it up later).

If you take a small subset of the market your chances of underperforming are much larger than outperforming the index. That is before cost/tax come into play.
You are probably referring to Hendrik Bessembinder's paper "Do Stocks Outperform Treasury Bills?"

https://www.universal-investment.com/me ... ry%20Bills

It is an interesting and worthwhile read, but it makes unrealistic assumptions and has to be read critically. The conclusions served up by the popular press should be read even more critically.

The Bessembinder paper assumes that all dividends always are reinvested in the stocks that paid the dividends, and that no dividends ever are kept or spent otherwise by the shareholders. The necessary result of this assumption is that any company that ever goes bankrupt is considered to be a total failure, regardless of how much it distributed in dividends during its lifetime, because all of those dividends were assumed to have been reinvested in the failed stock. This is not a realistic assumption.

Bessembinder implicitly recognizes this in page 27 of his paper:

"Consider, as a case in point, General Motors Corporation (GM), which delisted in June
2009 following a Chapter 11 bankruptcy filing. The delisting share price for its main class of
common stock was $0.61, compared to $93 less than a decade earlier. Had the delisting share
price been zero instead of sixty one cents, GM’s lifetime buy-and-hold return would have been
-100%
. However, GM paid more than $64 billion in dividends to its shareholders in the decades
prior to its bankruptcy and also repurchased shares on multiple occasions, and these funds were
collectively available to investors for other purposes even after GM’s bankruptcy filing."


The paper also points out that rates of underperformance are highest for small capitalization stocks and for stocks that have entered the database in recent decades. Small-cap stocks and recent IPOs can easily be avoided until they have an acceptable track record and financials that are consistent with their pricing.

A traditional conservative stock portfolio is typically constituted of 10 - 30 stocks, typically dividend-paying, and all vetted for having both a track record and financial soundness. These dividends are either spent by the portfolio-owner, or reinvested in a way that is consistent with diversification. This approach should be just as viable today as it has been for previous generations.
You’re right, I actually looked at the study and there are many reasons why that 4% is very misleading. Learning every day :happy

When looking for new numbers I found a link that said the average amount of stocks that outperform the index is roughly 43%. This number moves up and down depending on the market but it is rarely larger than 50%. https://awealthofcommonsense.com/2019/0 ... rs-market/

I don’t know how that number is divided among different market sectors, marketcaps or factors or any such detailed information. If you were to pick stocks at random you would be up for a most likely underperformance. If you limit yourself to large cap would you be closer to 50%?

I also realise that underperforming the index is also not a disaster, if you still have a decent rate of return.
Secretly a dividend investor. Feel free to ask why.

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Re: Concentration risk over-rated?

Post by rkhusky » Fri Jul 31, 2020 9:44 am

I would not invest a significant amount of money in a single stock unless it was robust to earthquakes, hurricanes, volcanoes, pestilence, famines, pandemics, government regulation, nationalization, competition, obsolescence, fraud, etc, etc.

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Re: Concentration risk over-rated?

Post by JoeRetire » Fri Jul 31, 2020 10:07 am

Anon9001 wrote:
Tue Jul 28, 2020 9:50 am
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.
That depends on your ability to choose solely "quality" stocks and the probability that those quality stocks can consistently produce good returns.

Maybe you can choose wisely. Most can't.

(What does "quality" mean to you? How do you know you have chose a "quality" stock?)
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Re: Concentration risk over-rated?

Post by nedsaid » Fri Jul 31, 2020 10:52 am

Anon9001 wrote:
Wed Jul 29, 2020 9:21 am
nedsaid wrote:
Wed Jul 29, 2020 9:18 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.
There is a concentration risk in the S&P 500 and the US Total Stock Market Index but I don't know for certain how big that risk is. If you want to dilute the effect of the biggest stocks in the index, just simply couple it with a Value Index, a Small Value Index, or maybe a Small-Cap Index. I also wouldn't get to carried away with tilting away from the indexes. I have a Large Value tilt and a lesser Small Value tilt but I have gone about as far as I want to go. Don't overdo this.

In 1999, the S&P 500 and Total Stock Market had similar concentration and these indexes were essentially flat for about 12 years. The Value oriented funds had positive returns during those years and outperformed the broad indexes. The risk you run isn't disaster but that the S&P 500 and Total Stock Market could be flat for a while. If you have the long time horizon to wait these things out, I wouldn't give it another thought.
I am fairly confused why these indexes contain 500 stocks yet only 30-50 of them matter. Is there any reason to do this? Stock 499 would have 0.0005% compared to 5-10% weight of Stock 1. The moves in Stock 1 would move the index more than Stock 499 yet the index contains Stock 499 for no reason.
What I would say is that ALL stocks in an index matter. Certainly there is a subset of the market that drives most of the performance of the index, there has been a lot of talk about the FAANG stocks in recent years. The thing is the list of stocks in that subset changes over time, market leadership also changes. I own 22 stocks individually, most of them I have owned a long time, last I checked there were only four of them with losses. My experience is that for every five carefully chosen stocks is that one will wildly outperform your fondest expectations, three will perform about as you expect, and one will bomb. So it is pretty much that old 20%/80% rule.
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Re: Concentration risk over-rated?

Post by LFS1234 » Sat Aug 01, 2020 4:35 pm

Schlabba wrote:
Fri Jul 31, 2020 3:37 am

When looking for new numbers I found a link that said the average amount of stocks that outperform the index is roughly 43%. This number moves up and down depending on the market but it is rarely larger than 50%. https://awealthofcommonsense.com/2019/0 ... rs-market/

I don’t know how that number is divided among different market sectors, marketcaps or factors or any such detailed information. If you were to pick stocks at random you would be up for a most likely underperformance. If you limit yourself to large cap would you be closer to 50%?

I also realise that underperforming the index is also not a disaster, if you still have a decent rate of return.

The Michael Cembalest/JP Morgan study cited in your link is a nice find. From your link, Cembalest "looked at all U.S. common stocks that have traded on an exchange (essentially the CRSP stock universe) since 1973 which outperformed the S&P over rolling 10 year periods. The average number of stocks that outperformed over 10-year time horizons was around 43% while the median was 41%. But it was rare that this number exceeded 50% for very long. In just 22% of rolling 10 year periods was the number of stocks that outperformed the S&P 500 at 50% or higher.

Sector bubbles form from time to time. The below link contains a graph showing the sector composition of the S&P500 by equity capitalization during the years 1974 - 2014. In the energy bubble of around 1980, energy stocks constituted 26% of the index; in the tech bubble of around 1999, tech stocks constituted around 32% of the index, and in the finance bubble of around 2006, finance stocks constituted around 22% of the index.

https://www.businessinsider.com/chart-b ... 500-2014-4

The only correct way to calculate the investment returns of a stock is to do it for the relevant holding period and taking into account purchase price, sale price, dividends and investment expenses.

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Re: Concentration risk over-rated?

Post by Anon9001 » Sun Aug 02, 2020 7:34 am

I do think that if anyone else wants to try this approach make sure to check the stock Beta yourself. Don't use websites like Reuters or Yahoo Finance to see the stock Beta. Use Excel to calculate it. The Beta of the stock if it is truly quality should be less than 1. If the companies balance sheet is good but the Beta is higher than 1 say 1.2 than you need to investigation on why that is. I am not saying that the company you are investing in is fraud and they are lying about their balance sheet but like high cholesterol does not mean heart attack immediately it is still good idea to do ESG. CDSL which I invested in have a beta less than 1 so I am confident that it is quality company.

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Re: Concentration risk over-rated?

Post by midareff » Sun Aug 02, 2020 7:37 am

Anon9001 wrote:
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.
Except it's positive until it isn't.

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