Portfolio Management, Concentration or more Diversification

Portfolio Management, Concentration or more Diversification

  

There are two investors. Investor A runs a concentrated portfolio of five to eight stocks. He does all of his own due diligence. He accesses sedar.com and reads the annual and quarterly reports of the companies he's interested in. He inputs the companies metrics and ratios into a spreadsheet looking for trends over the last few years of the company's performance. He goes over the proxy statement and reads the bios of management and collects info on their compensation packages. He reads the M,D&A in the annual report to get management's views on where the company is headed and how they are going to get there. He reads the various press releases about the company published on sedar. He visits the companies' website to see if he can glean further clues about the prospects of the firm. He may even contact the company's customers and suppliers (fischer's scuttlebut) to gain further insight in how this company is viewed from the people they do business with. This investor still has to deal with his own psychological makeup as well as make sure he has a margin of safety when he buys his stocks. All of the information he has gathered about the companies he owns is his way of managing his risk. And finally he tries to take advantage of wager value in exploiting the market's inefficiencies and underused information. I'm almost out of breath just writing about all of this. Investor A in some strange way loves doing all of this. It is his process. He focuses on his process rather than the outcome. He likes to be in control and in charge of his destiny and his affairs. 

Investor B prefers to steal/borrow his investing ideas from other people (fund managers). Rather than handicapping the company he spends the majority of his time investigating the fund managers he wants to follow.  He insists that they run small concentrated portfolios with low portfolio turnover. He may even do some due diligence of his own but it will be at a much reduced scale than that of Investor A. He is more likely to visit morningstar's website to get the information about the companies he's interested in. He is a big believer in utility (putting in little while getting back a lot). He too will have to consider his psychological mindset, there is no way around that. Psychology trumps everything else put together. He will also insist on a margin of safety in the price of the stock he buys. He will handle his risk management by holding 15 to 20 or more companies to compensate for his lack of knowledge of the stocks he's holding in his portfolio. He will exploit the randomness in the market knowing that some of his stocks will do well over time and some won't. He is not bothered by this, he knows that even the best investors are only right about 66 percent of the time. He is out to make money over the long term just as Investor A is but he handles his risk in a different way. And he will use wager value in following fund managers who invest in the small to mid cap space where market inefficiencies are more apt to be found.  

There could even be an Investor C whose approach lies somewhere between the extremes of Investors A and B. The market is a multi-faceted place where there is no silver bullet. Every investor has to find the approach that is right for himself.