A concentrated position is when an abnormally high percentage of your portfolio is in one stock. While some argue that a concentrated position is the best way to make a fortune in the market, it’s also one of the most dangerous ways to invest your money. I’ve seen large positions in quality companies like General Electric (GE), JM Smucker (SJM), Morgan Stanley (MS), to name a few. I’ve also seen people that refuse to invest in anything other than precious metals. They fill their portfolios with gold, silver, copper or whatever else the latest fear mongering newsletter offers up. It’s great if being investing in gold makes you sleep better at night but, historically, it’s been a below average investment. There have a been a few time periods where the metals have outperformed but I liken that to catching lightning in a bottle.
Concentrated positions are a hallmark of hedge funds. Hedge fund managers often take big long and short positions to hit their target returns. People who invest in hedge funds are those who can afford to take a lot of risk.
More often than not, I’ve observed that concentrated positions are held by people that can not afford to take the risk. Here are a few reasons why people refuse to sell stocks.
1.) Sentimental Reasons: some people inherit large stock positions from relatives. They link the stock to the person that passed it to them. I met with a client once that had his entire net worth in JM Smucker (SJM). He inherited it from his mother and stated that he would never sell even one share. It seems like the investment may have done ok if he did maintain his conviction not to sell but he could have done a lot better if he had diversified.
2.) Comfort: Another client held all of her money in Morgan Stanley stock. Her husband worked for Sears and received the shares when the whole “Stocks and Socks” nonsense was being put out there. She wouldn’t sell any of it. She reasoned that if her husband could get a paycheck from the company for all those years then she could rely on it as well.
People invest in things that they are comfortable with. The most common concentrated positions come from stocks that people deal with day in and day out: banks, utilities, food stocks, etc.. While I always advocate investing in things that you know and understand, too much is too much. Worldcom and Enron were a big part of people’s daily lives for a long time too.
3.) They Don’t Know Any Better: this is intertwined with the comfort level, as well. If you’ve had the same stock for decades, you obviously haven’t taken the time to consider other options. Holding that stock is all you know and any argument to the contrary sounds like a snake oil sales pitch. Holding a stock and hoping that it goes up and continues to pay a dividend is all they know. Everything else is too complicated.
4.) They Don’t Want To Take A Loss. Let’s not be mistaken here, stocks do go to zero. When I was growing up, the major TV manufacturer was Zenith. I remember watching the news one morning and hearing that they “cancelled their common stock”. It was worthless.
People lose fifty percent on a stock and refuse to sell it. They are going to ride that thing until the bitter end. I wish I had a nickel for every time I’ve heard:
“ I don’t want to take a loss.”
“Uh, I think the stock will come back.”
No, it won’t. Sell the stock, cut your losses and move on.
“ I’m willing to ride it all the way down.”
Wait, didn’t you just tell me you didn’t want to take a loss?
What I’ve learned is that some people are just unwilling to change. I wonder if they think that the company feels the same type of loyalty to them? Now that’s a good question. I don’t like to make people uncomfortable when discussing investments, but I also don’t want them eating cat food when they are 80. The lady above with the Morgan Stanley shares? Yeah, she was eating cat food. Had $300k in stock and wouldn’t sell a share.