Concentrated investing but no big bets

by Laura Ehrenberg-Chesler on August 20, 2009

in Crossvault Capital,Investment Strategies,Mutual Funds

In the “Wall Street Journal” dated August 18,  there is discussing “focused” portfolios.  While we agree in practice and philosophy with much of the strategy, the managers they interviewed differed dramatically in one aspect of their strategy.

At Crossvault we have always argued that too much diversification, in other words owning 75 stocks, will result in performance that simply mimics an index, where there is no way for big winners to influence performance.

Where we differ however, is in the position size of each stock within the portfolio.  The managers referenced in the article often concentrate 60% of the portfolio in their top 10 holdings.  A more prudent approach, and the one that we adhere to, weights more equally each security, and no initial position exceeds 4%.

Following this strategy allows for meaningful position size without the added risk of placing too much focus on only a few stocks.

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