[🆓post] Investment Process: Concentration vs. Diversification

Some preliminary thoughts

Here’s a recent journal entry of a topic I’m working on for one of GeoInvesting’s upcoming Weekly Wrap-Up Summaries. It’s been an in-progress entry for five years, due to my internal battle of going back and forth on this topic. However, I decided to get something on the record, just in case it takes me another five years to stop procrastinating 🤐👇

🗒️ Investment Process Journal Entry:

I’ve been a diversified investor and I’ve been a concentrated investor. I do believe they both have their place. However, diversification in microcaps is interesting. Here are 5 big reasons, from a comprehensive list I’ve been compiling, to highlight why I think this is the case:

1. It can take time for microcaps to catalyze, due to lack of investor interest.

2. A few bad bets won’t ruin you. For example, even though you may have done great research on a concentrated bet, things can change that can dramatically dampen prospects. Maybe it’s tariffs, maybe it’s a regulatory event in the industry, maybe it’s losing insurance coverage for a biotech or medical device company.

3. You can get multiple exposure to quality megabagger opportunities in trending industries (i’m not talking about low quality pump and dumps). You only need one or two to work. For me, it’s been stuff like data center stock’s (TSSI TGEN PSIX PPIH) and satellite themes (FEIM ACCMF). Subsea is an interesting industry theme: MIND KLNG CODA.

All of these stocks reside in our Quality [Multibagger] Index.

4. You can place a few small bets on very undervalued stocks in industries that you don’t normally invest in or have an edge in. For me that would be banks, biotech, medical devices, mining and the oil & gas industry.

5. Even the CAGR of a concentrated portfolio with some great multibaggers can be normalized if outsized returns take several years to catalyze. This might sound absurd, but I’m looking for a much bigger CAGR of 20% to 30%. The drawdowns that can occur in microcap land demand that I aim for a lot higher CAGR. At least, that’s my opinion.

But this is really important. You still have to learn to be a good investor with a good research process. If you don’t, you’re going to either end up owning a few pieces of shit or a pile of shit.

Sure, Megabagger returns like a MSMqi holding, TSSI (NASDAQ), can easily more than offset the weaker performance of the laggards, but you still need the portfolio have a high “multibagger hit rate.” This means you want it to produce a good amount of multibaggers, maybe up to 40% to 50%, which is where our MSMqi currently sits. Why? Because drawdowns in a diversified microcap portfolio can be massive, possibly more than a concentrated portfolio.

I’ve concluded that some type of mix of diversification with selective concentration across a diversified portfolio fits my investing style. I just love researching companies and owning pieces of lots of great stories.

However, I also like taking big bets. This blend fits my personality, but it might not fit those of others. There are many ways to make money investing in stocks. I’m just fortunate and blessed that I found my “research style niche”, and found it early in life 😊

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