Investment Process: Diversification Vs. Concentration: Part Two

Different strokes for different folks

I wrote my latest journal entry after I landed in Fort Lauderdale Thursday afternoon. For the last two years, I’ve been jotting down anecdotes and notes for a potential article I’m writing on diversification versus concentration.

As a matter of fact, I recently shared some of these thoughts in an investment process article I published [here]. I’m just continuing to share my thought process with you as I struggle with my own internal battle on the subject, even though there might be some overlap as I continue to flush out certain subjects. My perspective has continued to evolve and I’m just “thinking out loud.” So, I apologize in advance for some of the repetition.

The 2½-hour plane ride from Puerto Rico gave me some extra time to think about the piece, especially since more and more people seem to be weighing in on the subject lately.

Managing our Microcap Quality Index (MSMqi), here on Substack, has helped me to constantly re-evaluate how diversification and concentration interact.

The MSMqi is a stock index platform that creates equally diversified indexes built around quality microcaps and high probability turnarounds hitting multi-bagger markers. The platform currently covers 123 stocks. Our subscribers either copy the Indexes or use them to find multibagger ideas. Each stock is accompanied by a research Cliff Note. We just added #123 this week.

I honestly don’t know when the full article will be finished. I keep rewriting it as my own experiences shift between periods of concentration and diversification. However, I wanted to get involved in the conversation.

What I do know is that our very diversified Stock Index platform has been the hunting ground for our team, which has now produced 57 MultiBaggers since February 2022, out of 123 stocks that have been added, or a 46.34% hit rate (just shy of our 50% goal).

Journal Entry On Diversification vs. Concentration

The popular saying goes: “Take your losses quickly and your profits slowly.” There’s truth there, but the profit/loss column shouldn’t be the sole purpose for decision making. Stock price movements don’t always reflect business reality. A price can rise for the wrong reasons and fall for the wrong reasons. “Good” analysis tries to sort that out.

If I had followed that rule blindly, I would’ve sold TSSI 0.00%↑ years before it ran from $0.50 to $30.

I’ll illustrate how diversification allows you to enter some, at best, average conviction yet interesting names that can be life changing.