The Dynamic art of Portfolio Management and Individual Position Sizing

by Bhuvan Gupta

How many stocks are sufficient to diversify a portfolio and yet generate a market alpha? It is a long debate among economists and statisticians. 

“Diversification is the best way to admit you have no idea what’s going to happen in the future.
It’s how you prepare a portfolio for a wide range of future possibilities and admit your own  infallibility.”  ~
Ben Carlson

Overdiversification tends to result in mediocre performance… 

Generally it’s been seen that individual novice investors have more than 30 stocks in their portfolio which could be higher diversification and yet higher risk since it is transfer of individual stock specific (unsystematic) risk to market (systematic) risk. Only when individual stocks are uncorrelated, the risk of a portfolio is curtailed. 

Whenever there were the stock market correction they find themselves highly frustrated since very thin knowledge about their portfolio holding forces them to press the sell button since it does not let them sleep in the night.

“The appeal of concentrated portfolio is that it is the only chance an investor has to beat the  averages by a noteworthy margin.” ~ Frank Martin

As per noted investor Joel Greenblatt, after purchasing six or eight stocks in different industries, the benefit of adding more stocks is a futile attempt to reduce the risk. 

Why do we have less than 15 stocks and will continue to run a concentrated portfolio (Founder’s Portfolio) ? 

Great ideas are rare and each stock behind its ticker hides many subsidiaries and infinite products and services to understand. Only with time we come to know whether they are great or gruesome.

Like Zoom Video Communications (disc: long) management also bought $132 Mio worth of their shares (as disclosed in 2023 Q1) alongside of our purchase. They also bought Solvvy, a cloud data center company. 

And for the last time, it’s not a Chinese company. 

When management keeps buying back their own shares when they are cheap it’s a high probability that the company will generate higher double digit returns for their shareholders. 

If you have read this far, my appeal to you (if you are our limited partner and investor) is to get to know your portfolio rather than just buying too many products. 

If you are an individual stock picker make sure you know the quality of your companies and their relevance for the next decade. 

I will end with a quote from legendary investor Phil Fisher: 

“For individuals, any holding of over twenty different stocks is a sign of financial incompetence.”

Happy Investing. 

Thank you for reading.

Bhuvan Gupta

About the Author

     Bhuvan Gupta                                     
     ( Founder and CEO – CFMC, CFCL )

      Follow Bhuvan Gupta on: 


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