Should I Make A Big Bet Within My Portfolio?

By | June 12, 2020

You own stock in 10 companies that you know very well (or should). Do you buy each in equal dollar amounts?

What if you know, really know, based on its financials or some other logical factor that one company stands the best chance of growing quickly? Is there anything so wrong with making it 15% of your portfolio instead of 10%?

No, actually there isn’t. Make the bigger bet in one company. If you’re wrong you’ll suffer a bit but if you’re right you will probably make quite a bit more money.

Poker and Stock Investing

Stock trading can be like poker. You bet higher when you have pocket aces, why not invest a little more for a stock that has more potential?

Now I am not saying that stock investing is like gambling. Gambling is usually something where the house has the advantage, and you are likely to walk away with less money at the end of the night. In stock investing, given enough time and making logical choices based on the financials, you should always come out a winner.

Am I Wrong?

Your stock price goes down right after you buy it. Does that mean you are wrong? Not necessarily. Give the stock some time.

Note that if you used the discounted present value calculation to determine a price to buy at, in theory the stock should go up after you buy it. But that doesn’t happen all the time. Perhaps you are buying a company that is not followed so much. Maybe the market is discounting the stock because of some macro-level issue. You just don’t know. But give it time.

When Should I Give Up On My Big Bet?

Are you right or wrong. Check the financials. See if something has recently come out in the news. See if maybe the company recently sold more shares. Don’t give up unless there is something fundamentally different than what you thought.

Behavior Of Large Cap Stocks

If your big bet is a large cap stock, there will still be better and worse days. But generally the stock won’t move much in either direction. If it goes down 10% in a day, either there is negative news about the company or a company insider sold off a lot of shares. Either may mean nothing.

Behavior Of Small Cap Stocks

If your big bet is a small cap stock, you may be in for a roller coaster ride. Small caps can make big moves on any given day and most of the time they mean nothing. The stock goes up 10% today, it goes down 10% tomorrow. Small caps have fewer analysts following them and are often owned by big hedge funds and such. Volume will be lower so any trading can move the needle.

Big Bets Require Bravery

If you are going to make a bigger bet, you are going to need to be brave and grow think skin. Don’t worry so much about the daily news.

At this point I check stock prices on my phone in the morning but rarely (never) trade based on stock price alone.

Hang in there and it will pay off.

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