Portfolio Changes Ahead!
Dear fellow investors!
Today, I’ll give you a short update on my investing strategy and possible implications for the portfolio.
I’m a big believer that concentrated portfolios are one of the best ways to outperform the market—perhaps even the best. However, it’s not the only one, and under certain circumstances, which I’ll evaluate in a minute, there might be other ways better suited.
Let’s first do a quick Pro and Con list of concentrated Portfolios:
Pro:
Deep Understanding: If you only own a handful of companies, you have lots of time to understand them very well
Big Impact: The fewer positions, the bigger the impact each has. If you’re right, one position playing out per year can be enough to outperform
Quick Reaction: If anything happens (thesis breaks down or plays out), you immediately notice and can act upon the development
Con:
Big Impact: It’s a pro and a con. If you’re wrong on one position, it can pull down the entire portfolio performance.
The company doesn’t even need to perform poorly/keep declining. I have an average buy-in on Alibaba at close to $75, and still, the opportunity costs are high throughout the holding period.
Missing out: One of the most difficult things for me personally is evaluating opportunity costs and deciding when to switch companies for each other. Especially since every transaction has additional costs.
And that last point is the core of today’s article.
I’m thinking about owning a lot more positions than originally planned. Since I focus more on research now (which was a great shift, by the way, and if you want to benefit from it, consider switching to Paid :))
I realized that there are so many great opportunities in the micro and small-cap space—so much more than in large caps—that it actually makes sense to own more positions. Especially since moats and competitive advantages are naturally smaller for micro and small caps, increasing the risks of something going wrong or not playing out as expected. The same goes for special situation investments.
I don’t think owning more (micro and small) companies will hurt the performance. You can easily maintain a hurdle rate of choosing only multi-bagger potential companies (1-5 years time horizon) while being better protected due to more diversification.
I’m not talking about owning 50 companies, but I can imagine that the portfolio will grow to 15-20 positions at some point. Some of them are compounders staying in the portfolio for the long run, while many will be short-term plays (a couple of months to 3 years).
It’s also beneficial for this research platform since updating the same 5 positions is quite boring (for you and me) while finding new investment opportunities delivers more value.
The great thing about running one’s own portfolio is that you can always adjust it to fit your current situation best. If I didn’t find any good positions, I would also hold a portfolio of three positions. I’ll just adapt to the market situation.
I just came across another great-looking opportunity. You'll receive a write-up shortly.
Until then 👋🏼
Daniel
Incase you’ve missed the last write-up, here it is: