Crossroads… Keep Diversifying or Start Concentrating

By Carsten Tolkmit from Kiel, Germany (crossroads) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

All Time Sleeping Average: (Target) 7h30m / day (Actual) 7h32m / day (147 night average)

3 Day Sleeping Average: (Target) 7+h / day (Actual) 7h08m / day (7h28m, 7h45m, 6h11m)

The situation is this. I’m currently monitoring 154 Wide Moat stocks and my personal stock portfolio has 10 Wide Moat stocks.

So the question is, do I keep diversifying and invest small sums in new undervalued stocks that pop up (which implies that each stock’s max weighting is 0.65%)? Or do I start concentrating and enforce a maximum no. of stocks allowed?

The problem with starting to concentrate is how to execute it. The biggest obstacle I face is whether or not to re-balance when we have a bear market. That way I would be permanently locking in my losses on stocks that were bought at severely undervalued prices to begin with.

And as we’re on the topic of bear market, do I concentrate during a bear market (eg. buy only from the top 10-20 stocks available) or do I just diversify like crazy (equal sums in each undervalued stock, which theoretically would be bountiful)?

As of now, I’m leaning towards the Mohnish Pabrai method of diversifying like crazy during bear market (when opportunities or abundant) whilst concentrating during bull markets (when opportunities are scarce). If opportunities are abundant, I just invest equal sums in numerous opportunities. If opportunities are scarce, then each stock’s max weighting will be 3.33%-5.00% when buying while the rest of the portfolio goes to cash.

I think diversifying like crazy during “any money put to work in late 2008 could have been a 4x“, and I’m open to the idea of leveraging up during a bear market to capture the once / few in a lifetime opportunities since “If you are going to be a very concentrated investor, you should not use leverage”.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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