To clarify I am referring to concentration of your investments, not the act of concentration, although that would help too!
As the name of this site is Dividend Tycoon, I felt it appropriate to write something related to that name, as I believe my way of thinking about investing is slightly at odds with the mainstream.
Conventional wisdom says that you should hold a diversified portfolio. Not only should you hold a large number of stocks, but you should also be diversified among asset classes. For most people this is good advice, it spreads your risk, you do not have all your eggs in one basket.
As a future Dividend Tycoon I have taken a different approach to investing, mainly because investing is to a large degree my business. Investing to me is not something that is done with what is left at the end of the month, and putting those funds into a diversified mutual fund managed by some fund manager sitting in a fancy office somewhere. Rather I see my stock portfolio as my ticket to future financial independence, and I need it to keep growing at a high growth rate, and it should not be continually sucked dry by paying a fund manager, who will allocate 2 or 3% of my capital to their 30-50 best ideas, which I think is in itself a contradiction in terms, surely one can only have a few best ideas? What is more, there is a high probability that their best ideas are found by looking at what other fund managers are holding!
As an independent investor it is up to me to decide on my portfolio weightings, so if I have an idea regarding a stock that I believe is excellent, I can allocate any percentage of my capital to that idea. This has led me to having two positions which are each around 30% of my portfolio. This is not something to take lightly, you really have to be very confident that your analysis is right, and keep updating yourself with regard to these positions. I started acquiring a position in both these stocks in 2010, and have kept adding.
The effect of this concentration is that if you are right in your analysis and the stock does better than average, then you will beat the index, sometimes by a lot. As it stands, my one position has done quite a bit better than average, the other one has been average, but I believe the best is yet to come and I have to be patient to be fully rewarded.
However, performance aside, I believe the greatest benefit of concentration is that you think as a business owner, or a Tycoon. I really feel that I am an owner of these businesses, because my stake is material, especially to me! I am invested in keeping up to date with the company, always reading news about them, attending AGM’s and presentations. I cannot afford to become a passive investor and hope that management is doing well, I need to be watching them, closely. I need to visit their business sites and see how busy they are.
Now if I have allocated one or two percent of my portfolio to a company it does not feel like I am a true business owner, it feels like my portfolio is nothing more than a mutual fund, even if it is manged by me.
I should point out that I do have smaller positions in my portfolio, but they are perhaps just my initial steps towards acquiring larger stakes. Unfortunately one has to invest with the funds available, and while I would love to increase some of the smaller positions, it is simply not possible. New funds will come, I have some coming from my hotels (see last paragraph), and lastly I am hoping that the large positions I have referred to above, will become the stocks I think they will, and if I am right they will start to pay ever greater dividends, which I can use for diversification. I am not going to sell a large position for the purposes of diversification if I still believe in the potential of these businesses.
A big disclaimer
Please note that my strategy is not one that most people should follow. They should be widely diversified, they should allow a fund manager or an index fund to manage their money. They should not put all their eggs in one, or even a few baskets. This site though is about becoming a Dividend Tycoon, and doing something different. You need to decide what is best for you, this is just my strategy. However, I will leave you with a quote. “Diversification is protection against ignorance” That quote is from none other than Warren Buffett, the ultimate Dividend Tycoon.
ps. Quick update on my hotels. There was a stock exchange filing today stating that the circular has been delayed until 5th October. Rather irritating, but these things are par for the course. If you have no idea what I am talking about, see my previous article here.