Here at The Bahnsen Group, our Founder and namesake for the firm, David Bahnsen, wrote a book outlining our primary investment strategy, The Case for Dividend Growth: Investing in a Post-Crisis World. This Dividend Growth portfolio, which we refer to as Core Dividend, is made up of approximately 30 individual businesses (stocks). This number of securities was not chosen at random, it is much like that of a golf bag holding 14 clubs. At 30 securities, our investment committee, and our team of analysts, can know each of these businesses intimately, AND we can enjoy most all of the benefits of diversification.

Just like 1,000 clubs in our bag wouldn’t transform us into a golf Hall of Famer, more securities won’t continue to meaningfully reduce risk/volatility. The “why” is the important part here. When investing, we are facing two different types of risk – Business Risk and Market Risk. Business risks are the risks unique to that one particular business and how individual circumstances or events can uniquely impact that one business versus the entire industry or market. Perhaps a CEO is revealed for his or her scandalous activities, or a lawsuit comes forward against that business or financial troubles birthed from overspending and overborrowing. As a hypothetical, if one owns 25 individual stocks equally, this means the greatest concentration in one business is 4%. Sure, one should have other prudent risk management measures to diversify across industries and be aware of interest rates or commodity sensitivities prevalent in the businesses they own, but in general, this maximum concentration – in this example – of 4% is meant to diversify away from that individual business risk. If an unforeseen and unfortunate event occurs to one of those portfolio companies, even a 50% hit to the downside would only surface as a 2% drop to the portfolio – we call this attribution.

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