Risks And Rewards Of Concentration

(Video length 01:00:40)

In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed the Risks And Rewards Of Concentration. Here’s an excerpt from the episode:

Tobias: I’ll take it away, because I’ve got the conch and I’m always lazy and I finally prepared something, so here I guess. It’s a nice bit, the JP Morgan paper, The Agony & The Ecstasy, the risks and rewards of a concentrated stock position that looked at the Russell 3000. Basically, 40% of Russell 3000 companies have negative absolute returns. You’d have been better of holding cash, in that instance. The reason that I wanted to highlight it because I think this is potentially something you could put into your list of just stuff to be careful of. They listed out what are the primary reasons for business failure?

The first one is commodity price risks that cannot be hedged away. We probably already knew that, so just be careful of the commodity businesses. Government policy. This is a really long one, but that just about anything that they can change can hurt you, including regulation and deregulation. When the federal government’s moving around, you’ve got to be a little bit careful there. Intellectual property infringement by domestic or foreign firms. Foreign competitors whose market share is magnified by government subsidies. The impact of patent trolls. Changes in the US or foreign government tariff or trade policy. Fraud by nonexecutive employees. A shift in buying power to the firm’s customers, resulting from consolidation. Unconstrained expansion by competitors. I don’t know how useful that list is, but it’s just interesting– everything that can go wrong. [laughs]

Jake: D, All of the above.

Tobias: I don’t know how much of that you could identify prospectively, maybe be careful of commodity businesses, maybe be careful of businesses that are heavily regulated or not regulated at all. I don’t know. I don’t think there’s anything that–

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