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In the coming days, I will write about some common myths of investing. Many of these myths have been propagated by the fund management industry — largely because they serve its interests.
Let’s start with the first myth: “Timing of purchase does not matter.”
In the below article, a well-known money manager argues that buying a great stock at any price is acceptable. Not surprisingly, this money manager has consistently underperformed the benchmark.
https://lnkd.in/dRfnxJ9u
The example cited — Asian Paints — was an outlier and has since succumbed to market fluctuations. But why would an experienced value investor, with multiple books and accolades, miss such an obvious point? As Charlie Munger would say, the answer lies in “motivation bias” .If investors were taught to wait for the right moment — typically during a crisis — how would a fund manager gather assets? Nothing beats the human mind’s ability to justify questionable actions with perfectly biased reasoning, as demonstrated in this article.
Buying during a crisis — at a steep discount — is how real alpha is created. It’s also how you build a margin of safety if your thesis is wrong. Warren Buffett captured this perfectly:
“Big opportunities come infrequently… and when it rains gold, grab a washtub, not a teaspoon.”
The best time to invest isn’t “anytime.”
It’s when the world is panicking.
Disclaimer: The stocks cited are for informational purpose only and are not investment advice.

Diversification across uncorrelated or negatively correlated asset classes such as equities and gold does reduce risk, since gold often acts as a hedge against equity.
However here I am talking about diversification across a single asset class : Equity. Within equities, excessive diversification often hurts more than it helps.

Look at most Mutual Fund Portfolios and you will find them highly diversified with maximum holding rarely crossing 6%. Most Money Managers rely on diversification as a method to reduce risk, but this also reduces return. Due to low allocation, winners in the portfolio don’t move the needle much, and wide diversification forces managers to trim successful positions to maintain balance.
Now consider the approach of legendary investors:
1️⃣ Warren Buffett held concentrated bets throughout his career, with the top four or five companies making up 50 to 60 percent of Berkshire’s portfolio.
He says: “Diversification is protection against ignorance. If you know what you’re doing, it makes little sense.”
Here you can get the details of his portfolio across decades: https://lnkd.in/dXz2WsJp
2️⃣ Charlie Munger had his life savings invested across Berkshire, Costco, and Li Lu’s Himalaya Capital.
3️⃣ Nick Sleep (Nomad Fund) ran one of the best-performing funds between 2001 and 2013 with a small number of high-conviction bets.
4️⃣ Li Lu (Himalaya Capital) at one point had BYD alone accounting for 40 to 50 percent of his assets.
5️⃣ Rakesh Jhunjhunwala had Titan forming 35 to 40 percent of his portfolio for years.

💡 The Lesson
An optimum equity portfolio usually lies in the range of 12 to 18 stocks. This is neither too concentrated nor excessively diversified. Over time, one or two of these gems will compound so strongly that they dominate the portfolio, sometimes becoming 40 to 50 percent of its value. And that is fine!
As Mohnish Pabrai advises: think like a business owner. If you believe in the story, you should be comfortable being heavily invested in it.

⚠️ Important Note:
Concentration works only if you have conviction, deep research, and the temperament to withstand volatility. For most investors without the time or expertise, some diversification is not ignorance but insurance. Disclaimer: The stocks cited are for informational purpose only and are not investment advice.

In other words to generate higher returns one has to invest in small and midcaps. While it is true that most large caps, once they reach maturity, tend to grow at a steady pace and consequently deliver low to moderate returns, there are a few rare companies that continue to grow at a brisk pace even after attaining scale.
The beauty of such gems is that their reliability makes them less volatile (lower risk) while still compounding wealth at high rates. Some examples are:

Titan entered the Nifty 50 index in 2018. It was already a well-discovered large cap by then. Since then, it has delivered ~25% CAGR (price return only, dividends not included).
Amazon became a well-discovered large cap (>$20 bn market cap) around the year 2001. Since then, it has compounded at ~29% CAGR.
Costco crossed a $20 bn market cap around 2000. Since then, it has grown at ~14% CAGR (price return only, dividends not included).
Alphabet (Google) had a market cap of over $20 bn soon after its IPO in 2004, effectively making it a large cap from inception. Since then, it has compounded at ~24% CAGR.

What makes these elephants dance?

Very strong moats and long runways for growth (Titan, Costco)
A DNA of investing in product and service innovation (Amazon, Alphabet)
A culture of embracing failure (all)
Visionary management teams that constantly stay ahead of the curve (all)

Such rare companies having the ability to deliver consistent growth at scale, offer the holy grail of investing: impressive returns with relatively lower risk compared to mid and small caps.
Disclaimer: The stocks cited are for informational purpose only and are not investment advice.