Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / The Case for Concentrated Portfolios in 2026
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, know that this show is built entirely on listener support, not ads. A small group already keeps it going through buy me a coffee dot com slash fexingo. Luna: It really does change the dynamic when you aren't chasing clicks or sponsors. It lets us dig into the actual mechanics of how these businesses work without rushing. Lucas: Exactly. And that freedom matters today because we’re tackling something that feels counterintuitive to most people: the idea that owning fewer stocks is often smarter than owning more. The conventional wisdom has always been diversification, right? Own enough so that no single failure can hurt you. But if you look at the data over the last decade, particularly in a market where the S&P 500 is sitting near 7,719, the best performers are usually those who took real conviction in a handful of names. Luna: But doesn’t that just shift the risk from company-specific to personal wealth destruction if you pick wrong? It feels like betting the farm. Lucas: It feels that way until you realize that most diversified portfolios are filled with companies you don’t understand, just to hit some arbitrary cap. I’m talking about a concentrated portfolio of maybe ten to twenty stocks. You do the deep research on each one. You know exactly what they sell, who buys it, and why they win. When you own JPMorgan, for instance, you aren’t just holding a ticker; you’re holding a bet on the entire financial system’s ability to intermediate capital efficiently. Luna: So you’re arguing that ignorance is the real danger here, not volatility? Because a diversified fund spreads out your ignorance across fifty companies instead of five. Lucas: Precisely. Let’s look at JPMorgan specifically. It’s trading around 358 dollars now, up nearly 1 percent over the last week. That might sound modest, but if you’ve been tracking their balance sheet, you know they’re leveraging their scale in ways that smaller banks simply cannot match. They have the deposit base to lend at higher margins while competitors scramble for expensive funding. That’s a structural advantage, not a lucky break. Luna: Right, and their cost efficiency ratio has been improving. They’re spending less to generate each dollar of revenue compared to peers like Bank of America. Lucas: That’s the key. Bank of America is up 1.7 percent over the same period, which is nice, but JPM’s operational leverage is superior. When you concentrate your portfolio, you want companies with that kind of visible, durable moat. If you own JPMorgan, you’re essentially owning a toll road on global commerce. You don’t need to predict the next tech trend; you just need to believe that businesses will continue to borrow and save money. Luna: But what happens when the cycle turns? Banks are cyclical. If the economy slows, loan defaults rise. Doesn’t that make them risky for a concentrated hold? Lucas: Cyclical yes, but also resilient. Jamie Dimon’s team has spent years building capital buffers. In a downturn, smaller lenders get squeezed out, and JPMorgan actually gains market share. It’s counter-cyclical in practice. The risk isn’t that the bank fails; the risk is that you panic-sell when the headline says 'recession fears mount.' A concentrated portfolio requires you to be comfortable being uncomfortable. Luna: I agree on the psychological barrier. Most people check their phone every hour. If they only have five holdings, every dip feels catastrophic. How do you structure that mentally? Lucas: You structure it by limiting the number of decisions you make. I suggest starting with a core of ten to fifteen stocks. Maybe three financials, three consumer staples, two tech, two industrials, and one healthcare. You rebalance annually, not daily. You ignore the daily noise. The VIX might spike, the Fed might hint at rate changes, but if your thesis on JPMorgan hasn’t changed, you don’t touch it. Luna: That sounds disciplined, but it also means you’re missing out on everything else. What if NVIDIA keeps climbing while you sit on your banks? You feel left behind. Lucas: You miss out on the hype, yes. But let’s look at NVIDIA. It’s up 4.3 percent over the last five days, trading at 230 dollars. It’s a phenomenal company, but its valuation demands perfection. If you put half your portfolio into a stock priced for infinite growth, you’re exposing yourself to massive downside if even one quarter misses expectations. Concentration allows you to overweight quality, not just momentum. Luna: So you’re saying NVIDIA is fine for a satellite position, but not a core anchor? Because the margin for error is thinner. Lucas: Exactly. NVIDIA is a great example of a company with a wide moat in AI infrastructure, but the price to earnings ratio is already reflecting years of future success. JPMorgan, by contrast, trades at a more reasonable multiple relative to its book value. You’re buying cash flow, not just dreams. For a concentrated portfolio, cash flow is king because it funds dividends and buybacks regardless of market sentiment. Luna: And buybacks are a huge tailwind right now. We saw earlier how buyback announcements can hide deeper signals for stock pickers. Companies are returning capital aggressively. Lucas: They are. JPMorgan has been buying back shares steadily. When a company repurchases its own stock, it reduces the share count, which boosts earnings per share for remaining holders. It’s a compounding machine. If you own 5 percent of JPMorgan, and they buy back 2 percent of shares, your ownership stake effectively increases without you spending another dime. That’s the power of concentrated equity ownership. Luna: It’s almost like owning a private business rather than a public ticker. You care about the underlying economics, not the daily price tag. Lucas: That’s the mindset shift. Private equity investors spend months analyzing a single deal. Public market investors should do the same, even if the stakes are smaller. You don’t need to own 500 stocks to be diversified. You need to own 15 stocks that are truly diverse in their business models. One sells software, one sells insurance, one sells energy. If one sector crashes, the others hold the line. Luna: So diversification comes from business model variety, not just quantity. That flips the script on how most people talk about asset allocation. Lucas: It does. Most people think owning Apple and Microsoft is diversified. They’re both tech giants dependent on consumer discretionary spending. If consumers stop buying iPhones and cloud services, both drop. You need true separation. Pair a tech stock with an energy company like Exxon, which is down 0.9 percent recently, or a healthcare giant like Pfizer, which is flat. The correlations matter more than the count. Luna: Exxon is interesting because it’s a cash cow. Even if oil prices fluctuate, their capital discipline has improved. Are you suggesting we treat energy as a defensive play now? Lucas: Not purely defensive, but stabilizing. Energy stocks provide yield and inflation protection. In a world where interest rates are sticky, having assets that generate real cash regardless of monetary policy is valuable. You’re not trying to time the oil price; you’re trying to capture the free cash flow that can be returned to shareholders. Luna: That makes sense. It’s about building a portfolio that survives different macro environments, not just booming ones. But how do you actually find these stocks? Where do you start the research? Lucas: Start with the annual report. Read the letter from the CEO. Look at the capital allocation section. Ask yourself: would I be happy if this company stayed private for the next ten years? If the answer is no, why am I owning it? I read JPMorgan’s latest filing last night. The tone was measured, focused on long-term lending relationships, not short-term trading wins. That tells me a lot about their culture. Luna: Culture is hard to quantify, but it drives execution. A bank with a toxic culture might cut corners on risk management, which could blow up later. Lucas: Spot on. Culture is a moat too. It’s hard for competitors to copy a team that trusts each other and follows clear guidelines. You see this in tech with Google, in finance with JPMorgan, in retail with Costco. The operational excellence compounds over time. Your job as a stock picker is to identify those cultures before the market fully prices them in. Luna: But the market is efficient. Isn’t it hard to find mispriced cultural advantages? Everyone reads the same reports. Lucas: Everyone reads the headlines, not the details. The nuance is in the footnotes. For example, JPMorgan’s investment banking fees might have dipped slightly, but their transaction banking fees are rising. The market sees the dip and sells. You see the rise and buy. That’s the edge. It’s not about knowing more information; it’s about interpreting existing information better. Luna: So patience is part of the research. You wait for the market to misinterpret a detail, then you act. It’s a slow game. Lucas: It is. And it’s boring. There’s no adrenaline in buying a bank when everyone else is chasing the next meme stock. But boredom is profitable. Over ten years, the compound effect of owning high-quality businesses at fair prices beats trying to swing for the fences. You’re playing chess, not poker. Luna: I like that analogy. Poker is about bluffing and odds. Chess is about positioning and foresight. Which one fits your approach better? Lucas: Chess. Always. Bluffing doesn’t work in fundamental investing. The numbers eventually tell the truth. If a company’s earnings don’t grow, the stock price will follow, no matter how good the story is. JPMorgan’s earnings are growing because their net interest income is healthy and their expenses are controlled. The math works. Luna: And that’s why we focus on specific companies like JPMorgan rather than vague sectors. It forces us to confront the actual business reality. Lucas: Exactly. Vagueness is where investors lose money. Specificity is where they make it. So, if you’re thinking about concentrating your portfolio, start by writing down your top ten ideas. Research them deeply. Ignore the daily news. Hold them for years. You’ll likely sleep better and end up richer. Luna: A quiet portfolio in a noisy market. It’s a compelling idea, especially with the S&P 500 hitting new highs. Less is more. Lucas: Less is more, if you know what you own. Thanks for listening, please subscribe