The Dangers of Concentrated Stock Picking; 100 to 1 Returns

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So you want to be a stock picker: The Agony and the Estacsy of Stock Picking An article on the dangers of concentration.

The above article should be a sobering reminder of how difficult it is to choose exceptional stocks.   Remember when reading about great compounding machines like Wal-Mart in its early days (1970 to 1999) that you must take into account survivorship and hindsight bias.

Picking Stocks and 100 to 1

Wal-Mart 50 Year Chart_SRC


Ben Graham and the Growth Investor_011415 final

MTY Food Group 100 bagger analysis


Good luck hunting!

How central bank intervention will end: BADLY!

4 responses to “The Dangers of Concentrated Stock Picking; 100 to 1 Returns

  1. I tend to take with a grain of salt articles like “The Agony and the Estacsy of Stock Picking” that speak almost exclusively in terms of statistics. One thing I’ve learned is that statistics for a certain case are only relevant when one has complete ignorance regarding that case. For example, take this excerpt from the article concerning stocks in the Russell 3000:

    “The median stock underperformed the market with an excess lifetime return of -54%. In other words, in most cases, a concentrated holder would have been better off invested in the market.”

    All this basically tells me is that if I were to draw from a hat that contains all Russell 300o stocks and bought the stock I drew, I would likely lose money on that stock over time. Once any analysis on those stocks has been performed, statistics like that become pretty much meaningless.

  2. Thanks Daniel for addressing that point in the article. I ignored the subject of ignorance and concentration because I figure most readers will understand that ignorance and concentration can be harmful rather than helpful. Knowledge of what you doing (and the price you pay) are what reduce risk of permanent capital loss. When you pay way above asset value for supra-normal profits due to a boom then that money is permanently lost.

    I do want readers to be aware of the risk of permanent capital loss. Many of the examples like the Internet stocks of the early 2000’s were victims of the capital cycle boom bust. Money flooded into an “exciting” new industry to cause mal-investment and future lower returns.

    The capital cycle and Austrian Business Cycle Theory and the structure of production (all found on the blog–use search box) help one understand the regression to the mean of stocks. Finding companies resistant to regression to the mean because of their competitive advantage is both rewarding and difficult.

  3. Agreed, understanding the nature of the business cycle is important for understanding where to look and where not to look for ideas, since regression to the mean works both ways.

    I’m in the camp that believes that trying to find companies with competitive advantages that aren’t already priced at fair value is a waste of time for most investors. I believe most small investors would do best with something like a net-net strategy.

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