The Agony and The Ecstasy, a study of the risks and rewards of concentrated investing by Michael Cembalest, Chairman of Market and Investment Strategy for J.P.Morgan Asset Management (H/T Meb Faber), finds that 75% of all concentrated stockholders would have benefited from some measure of diversification in their portfolios.
A concentrated investment in a company may turn sour due to any number of reasons including unbridled expansion on an overly-leveraged balance sheet, management not understanding changes in industry dynamics, underestimating competition, or bungling an important acquisition. However, crucially, a company may fail because of factors outside its control.
“As difficult as it is to build a company and amass wealth, it is just as difficult to keep...
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