Warren Buffett, the greatest investor of all time, popularized the concept of a concentrated portfolio when he observed, somewhat contemptuously, that “Diversification is protection against ignorance. It makes little sense if you know what you are doing”. Warren Buffett implied that it is only a novice investor who will stuff his portfolio with all sorts of stocks while the ace investor will focus on only a couple of stocks.
Warren Buffett later formulated the concept of a “punching card with 20 slots” implying that we must be very careful with our stock selection and buy only if we are absolutely confident about the prospects of the stock.
Now, the surprising aspect is that while novice investors like you and me are struggling to follow the dictates of Warren Buffett, super-savvy investors are not paying any heed to his advice.
Dolly Khanna (a.k.a. Rajiv Khanna), our favourite stock wizard, recently revealed to CNBC TV18 that he/ she has a whopping number of 40 stocks in his/ her portfolio. The other surprising revelation is that Dolly/ Rajiv Khanna buys in small lots over a period of time and that several of his/ her stock picks are still unknown to us. One indication of this is that Dolly/ Rajiv are shown to be amongst the top ten shareholders of NOCIL as per the latest annual report though nobody is aware of the fact.
Vijay Kedia, another of our favourite stock wizards, was asked a pointed question by Nikunj Dalmia of ET on why he has diversified his portfolio to such a great extent by buying bits and pieces of several stocks. Vijay Kedia sheepishly admitted that he was unable to muster the confidence to buy large stakes in any particular company. Vijay Kedia’s portfolio presently contains Cera Sanitaryware, Atul Auto, Stewarts & LLoyd, Premier Explosives, Aries Agro, Amrutanjan, Apar Industries, Liberty Shoes, Manjushree Technopack, LIC Housing, Sudarshan Chemicals, TCPL Packaging, Repro India, Salzer Electronics, Bharat Electronics, Indian Terrain Fashions, RCF, NBCC etc.
If you want more proof, you can look at the portfolio of Ashish Kacholia, a stock wizard with impeccable credentials for finding multi-bagger stocks. In the recent past itself, Ashish Kacholia has bought a number of stocks such as Shaily Engineering Plastics, Pokarna, Eveready Industries, Shreyas Shipping, Pennar Industries, Dynamatic Technologies, Navin Fluorine International, Ashiana Housing, Gati, Kitex, Axiscades, Lokesh Machines, Zen Technologies, Vadilal Industries, MAN Industries etc.
If you ponder over the situation, you will realize the wisdom of these wizards. Having a super-concentrated portfolio is fraught with great danger because while you might have great confidence in the stock today, what happens if tomorrow you find that your confidence is misplaced?
One example of this is what happened to Basant Maheshwari’s portfolio. Basant advocates the virtues of a concentrated portfolio and has a handful of stocks such as Page Industries, Gruh Finance, HDFC Bank, Repco Home Finance and Hawkins Cookers in his portfolio. However, the failure of Hawkins and the sluggishness of HDFC Bank and Gruh Finance means that the performance of the portfolio may be nothing to write home about.
The best way to resolve the imbroglio is to follow the path shown by Rakesh Jhunjhunwala, the Badshah of Dalal Street. While Rakesh Jhunjhunwala has a number of stocks in his portfolio, he has cleverly divided them into a ‘high conviction basket’ and a ‘medium/ low conviction basket’. The ‘high conviction’ basket has a handful of trusted stocks like Titan Industries, Lupin, CRISIL, etc, with the maximum allocation of capital while the other basket has all the other stocks, with a low allocation to each stock. This way, Rakesh Jhunjhunwala enjoys the benefits of a concentrated portfolio which keeping the risks under check.