Displaying items by tag: concentration

(New York)

One of the big outcomes of the huge rout to end last year was that stock pickers had reportedly gone back to doing what they did best—picking individual stocks based on fundamental value, signaling a diversity of holdings. However, in aggregate, that view appears to be hogwash, as new data shows that institutional equity ownership in stocks is at its highest point in years. Goldman Sachs follows this data and tracks how many companies are among the 50 most owned by hedge funds and mutual funds alike. Right now it is 13, which is the highest level since 2017. Industrial and tech stocks were the most held.

FINSUM: The most concentrated stock holdings are, the more risk there is for steep falls in those names.

(San Francisco)

Last week’s nosedive in Facebook shares was nothing short of historic. Twitter followed close on its heels. The big question for investors is whether these flops signal anything about the greater market, or were they just idiosyncratic falls? The answer is that they may. Stocks are very concentrated at the moment, with a small group of tech stocks—the FAANGS—driving the gains. Therefore, losses in that group could drive down the whole market, and even be seen as a bellwether. Today’s concentration is roughly on par with 1999, but differently, all the leaders are in the same sector—tech, making the market more vulnerable. Because tech companies are also the engine for growth, their predicted expansions make up an even larger share of forecasted earnings growth than their current market capitalization.

FINSUM: We see the point of this argument, but we do want to point out one important caveat: the word “tech” itself. We use that term very liberally today. While it is easy to say the concentration is dangerous because all the constituents are “tech”, Amazon, Apple, Facebook, and Netflix are all very different businesses, so perhaps not as intercorrelated as “tech” would indicate.

(New York)

One of the big conundrums in markets is that while it is practically gospel to diversify into a wide range of securities and asset classes, some of the best and most famous investors do the exact opposite. As evidence, just consider the investing styles of Warren Buffett, George Soros, or Bernard Baruch. Forbes has published a piece examining this seeming disconnect, and provides some interesting insights. According to Buffett, “Diversification is a protection against ignorance … [It] makes very little sense for those who know what they’re doing”. Baruch adds, “It is unwise to spread one’s funds over too many different securities … Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues”.

FINSUM: Okay, a couple of points here. Firstly, those investors can afford the big losses that can occur with a concentrated portfolio. And secondly, since they invest for a living, they have the time to devote to deeply understanding each of their holdings. For the 99.99% of people not in that group, diversification has major benefits.

(New York)

This topic gets thrown around a reasonable amount in the media, but because it seems to defy normal human perception, we wanted to run a story on it—the growing and dangerous level of stock concentration. So what do we mean by that? We mean that three stocks—Amazon, Microsoft, and Netflix, have accounted for almost 50% of all the gains of the S&P 500 so far this year. This kind of concentration plays itself out time and again, whether it be in broad index tracking, or in niche sector ETFs, which end up being hugely weighted to just a few stocks.

FINSUM: Anyone can understand the danger of concentration at the point of purchase, but one of the key points to remember is that time tends to make a portfolio more and more unbalanced as the winners inevitably grab a larger share and the losers less.