Monday, June 30, 2008

Concentration or Diversification

Assuming a normal market (i.e. with known risks and exit mechanisms), investors tend to get torn between concentration gains or dispersion of risk in their stock picks. This is an understable dilemma where the market is volatile, has unknown risks and difficult exit mechanisms for example due to limits on withdraws or illiquidity.
Lakini if you are an investor at the NSE and have been for a spell (typically an investor who has traded over a full presidential cycle), the above dilemma is more one of concentrating your choice to picking stocks that give gains vs dispersing your gains. If you understand the market, then the only excuse for holding a portfolio with more than 6/7 stocks at the NSE would be as part of the legacy of trading in it for a long-time such that you've picked up gems over time. If then, some of the those gems will have turned into tramps and you should have disposed off them by now.

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