Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / The Case for Concentrated Bets
Transcript
- Lucas: I want to start with a number that jumped out at me today. Bank of America is up 2.1 percent in the last five days. Not a huge move, but in a market where the S&P 500 is basically flat, that kind of relative performance adds up over time. Luna: So you're saying that a stock picker who had a concentrated bet on BAC would be feeling pretty good this week? Lucas: Exactly. And that's the conversation I want to have today: the case for concentrated portfolios. I think the conventional wisdom — diversify, diversify, diversify — has gone too far. It's become a reflex, not a strategy. Luna: But isn't diversification the only free lunch in finance? I mean, that's literally what they teach in finance 101. Lucas: It is. And I'm not saying throw it out entirely. But think about it this way: if you own 50 stocks, and one of them goes up 50 percent, it barely moves the needle. You've diluted your best ideas. Meanwhile, if you've done real work — deep research on a company, understanding its moat, its management, its cash flow — why would you only put 2 percent of your portfolio into it? Luna: So what's the right number? 20 stocks? 10? Lucas: I think 10 to 15 is the sweet spot for someone who's truly engaged. Look at Berkshire Hathaway. Their top five holdings — Apple, Bank of America, American Express, Coca-Cola, Chevron — account for something like 75 percent of their equity portfolio. And it's worked pretty well for them. Luna: But Berkshire is also sitting on massive cash reserves. That's not the same as the average retail investor betting big on four or five names. Lucas: Fair point. But the principle holds. When you concentrate, you're forced to know your holdings cold. You're not just reading the quarterly earnings call transcript — you're tracking the company's competitive position, its capital allocation decisions, the industry dynamics. That level of scrutiny is hard to maintain across 30 or 40 names. Luna: So you're saying the average person should just own an index fund and then pick a handful of stocks they really believe in? Lucas: That's exactly what I'm saying. The core-satellite approach. Your core is the S&P 500 or a total market ETF — something like VTV or IWD, which have actually held up pretty well this week, up about half a percent. And then your satellites are 10 to 15 high-conviction picks where you've done the work. Luna: But what about the risk? I mean, look at Nvidia. It's down 2.7 percent in the last five days. If you were concentrated in NVDA, that's a rough week. Lucas: It is. But concentration doesn't mean you hold through everything. You have to size positions based on conviction, but also based on risk. A good rule of thumb: never let any single position exceed 15 percent of your portfolio. And you have to be willing to trim when a stock gets overvalued or when your thesis breaks. Luna: So it's not set-and-forget. You're actively managing the weights. Lucas: Right. And that's the discipline part. The average investor might be better off just buying the index and not touching it. But if you're listening to this podcast, you probably want to be more engaged. And I think a concentrated approach, done right, can beat the market over time. Luna: Let me play devil's advocate. There's a famous study — I think it's from Vanguard — that shows the average active fund underperforms its benchmark over 10 years. And those funds are run by professionals with entire teams. Lucas: That's true. But most of those funds are closet indexers — they own 100 stocks, so their returns are basically the market minus fees. True concentrated funds — like the ones run by Lou Simpson or Bill Ackman — have a much better track record. The key is differentiation. If your portfolio doesn't look much different from the S&P 500, you're not really picking stocks. You're just paying fees for noise. Luna: So how do you start? If someone listening wants to build a concentrated portfolio, what's the first step? Lucas: Start with a list of 20 to 30 stocks that you think you understand. Then ruthlessly narrow it down. Ask yourself: which of these do I know the best? Which have the widest moats? Which management teams do I trust most? And which are trading at a reasonable price? The intersection of those four questions should give you a handful of names. Luna: I like that framework. But what about the emotional side? It's hard to watch a stock drop 10 percent and not second-guess yourself. Lucas: No question. That's why you need a thesis written down. I literally keep a document for each of my holdings: why I bought it, what I expect to happen, and what would make me sell. When the stock drops, I go back to that document. If nothing fundamental has changed, I hold. If the thesis breaks, I sell. Luna: So discipline, but not stubbornness. Lucas: Exactly. And let's be real — even the best stock pickers get it wrong sometimes. But if you're right 6 out of 10 times, and you size your winners bigger than your losers, you can do very well. Luna: I think that's a good note to end on. Lucas, thanks for the conversation. Lucas: Thanks, Luna. And for our listeners, maybe take a look at your portfolio tonight. How many names do you own? And are they really your best ideas?