Concentrated Investments Run The Risk Of Business Destruction

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…