Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / The Art of the Concentrated Portfolio
Transcript
- Lucas: So this week's been a wild ride for stock pickers. The S&P 500 is up nearly six percent in five days, but underneath that, it's all over the place. Apple's down almost nine percent, while Microsoft is up almost twenty-seven. If you're holding a concentrated portfolio, that kind of divergence can make or break your year. Luna: And that's exactly what we're talking about today—the art of the concentrated portfolio. Not just what to pick, but how to build a portfolio that can take a punch. I feel like the market's testing everyone's conviction right now. Lucas: Yeah, and that's why we're glad to be doing this ad-free. We don't have to sell you anything. If you want to keep it that way, you can support the show at buy me a coffee dot com slash fexingo. But no pressure—let's get into it. Luna: Right. And honestly, in a week like this, having a clear framework matters more than any hot tip. So let's start with the basics—what does a concentrated portfolio actually mean? Lucas: Well, a concentrated portfolio is usually anywhere from ten to twenty stocks, sometimes fewer. The idea is that you're putting your biggest bets behind your highest-conviction ideas. You're not trying to own the whole market; you're trying to own the few businesses you understand best and believe in most. Luna: And that sounds simple, but it's actually really hard to stick with. When one stock drops ten percent in a week, you feel it a lot more than if it's a tiny piece of a diversified fund. Lucas: Exactly. And that's where temperament comes in. Look at Berkshire Hathaway—Warren Buffett's been running a concentrated portfolio for decades. He's said he'd be happy to own just five stocks if he had to. But it's not about bravado; it's about being comfortable with the swings. Luna: And speaking of Berkshire, their annual meeting is always a masterclass in this. What did you take away from this year's? I know you watched it. Lucas: The big theme was patience. Buffett and Greg Abel kept coming back to the idea that you don't need to do anything. They'd rather sit on cash than force a trade. And that's a huge lesson for anyone building a concentrated book—sometimes the best position is the one you don't take. Luna: That's a good point. But it's also easy to say when you have Berkshire's cash pile. For a normal investor, isn't the appeal of concentrated that you're putting money to work? Lucas: Sure, but the discipline is the same. You want your biggest positions to be your best ideas, but that doesn't mean every position is a slam dunk. You have to rank your ideas and size them accordingly. Luna: So how do you actually size positions? I feel like that's the part where people get stuck—they know they like a stock, but they don't know how much to buy. Lucas: There's no perfect formula, but a common approach is to start with a maximum position size—say, ten or fifteen percent of the portfolio—and then scale down based on conviction and risk. Some investors use volatility-based sizing, where you own more of a stable stock and less of a wild one. Luna: And that makes sense. But let's talk about a concrete example. David Einhorn at Greenlight Capital—he's been running a concentrated book for years. What can we learn from him? Lucas: Einhorn's a great case because he's not afraid to hold a big position in something that's out of favor. He's famously held a large stake in a gold miner, even when the market was skeptical. But he's also had to fight through serious drawdowns. It's a reminder that concentration amplifies both wins and losses. Luna: And that's the scary part. A concentrated portfolio can beat the market by a lot, but it can also lag by a lot. So what's the argument for doing it at all? Lucas: The academic argument is that diversification has diminishing returns. Once you own thirty or forty stocks, you've basically eliminated stock-specific risk, but you've also diluted your best ideas. A concentrated portfolio lets the winners actually move the needle. Luna: But you're also taking on more company-specific risk. Like, if you own ten stocks and one is Enron, that's a big deal. Lucas: Right, and that's why research is so important. You can't concentrate without doing the work. You have to understand the business, its moat, its management, and the risks. If you're not willing to do that, a diversified fund is probably smarter. Luna: So what does the research process look like for you? I know you've talked about reading annual reports and listening to earnings calls. Lucas: For me, it starts with the financial statements. I want to see consistent cash flow, a clean balance sheet, and a reasonable valuation. Then I dig into the industry and competitors. And I always write down a one-paragraph thesis—if I can't explain why I own it, I probably shouldn't. Luna: That's a good discipline. And it's something we'll come back to throughout this episode—building that thesis, checking your assumptions, and knowing when to sell. But let's first talk about the market we're in right now. Lucas: We're seeing a real rotation. The Nasdaq is up eight and a half percent in five days, but it's not broad—Apple's down, Microsoft's up. It's a stock picker's market, which is exactly when concentration can shine. Luna: And that's also when it can blow up in your face. Look, Apple's drop this week—is that a reason to sell if you own it, or is it a buying opportunity? Lucas: That's the million-dollar question. And the answer depends entirely on your thesis. If you bought Apple because of its ecosystem and services growth, a nine percent dip doesn't invalidate that. But if you owned it as a momentum trade, it might be time to reassess. Luna: So it's not about the price move; it's about whether your reasons for owning it are still intact. Lucas: Exactly. And the same goes for Microsoft, which is up twenty-seven percent in a week. If that rally takes it beyond what you think it's worth, maybe you trim. But if your thesis is about AI and cloud dominance, you might let it run. Luna: And that's the hard part—letting your winners run. It's natural to want to take profits, but the best investors often let their big positions grow. Lucas: Right. And that's where the temperament piece comes in. You have to be comfortable with volatility. A concentrated portfolio isn't for the faint of heart. If you're checking your portfolio every hour, you're going to drive yourself crazy. Luna: So what's a realistic number of stocks for a concentrated portfolio? I've heard everything from five to twenty. Lucas: I'd say ten to fifteen is a sweet spot for most individuals. It gives you enough diversification to avoid a single blowup wrecking you, but it's still concentrated enough that your best ideas matter. Fewer than ten and you're really betting on a handful of businesses. Luna: And that's not necessarily wrong, but it's riskier. You need to be really sure about each one. Lucas: Exactly. And that's why I think the key isn't just the number—it's the discipline. You need to have a process for when to buy, when to sell, and when to just sit there. That's what separates the people who can handle concentration from those who can't. Luna: And speaking of discipline, what about taxes? In a concentrated portfolio, you're probably trading less, which has tax benefits. Lucas: That's a great point. Holding for the long term means you're deferring capital gains, and you're not churning your portfolio. That's a real edge, especially for taxable accounts. Luna: So let's wrap up with some practical advice. If someone wants to build a concentrated portfolio, where should they start? Lucas: Start with the ideas you already know. Look at the companies you understand—maybe it's the one you work for, or the products you use every day. Then do the research, write your thesis, and size accordingly. And be patient. Luna: And be ready for weeks like this one. It's not going to be smooth sailing. Lucas: No, it's not. But that's the game. If you're in it for the long term, a concentrated portfolio can be a powerful tool—if you've built it right and can handle the swings. Luna: Well, with this week's action, we'll all get some practice. Thanks for listening, and we'll be back with more stock-picking insights.