120 - Philosophy of Concentrated Investing

Mental Models discussed in this podcast: Concentration vs Diversification Hurdle Rate Circle of Competence Conviction Opportunity Cost Satisficing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode120 How many stocks should you own? As many as you can that meet your hurdle rate? Only the best opportunities available? Optimal vs Satisficing Constraints on Holdings: Time Circle of Competence Conviction Additional Thoughts Collector of Businesses Hypothetical: What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge. Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10. What are you buying when buying a stock? Concentration: " The number of stocks you own is dependent on how you view yourself as an investor."  Is it possible to produce alpha? If yes, concentrate If no, diversify Are you a good investor? If yes, concentrate If no, diversify Conviction If yes, concentrate If no, diversify Summary: How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction.