Investing In Fewer Stocks Reaps Richer Dividends – Study
Taking the examples of Warren Buffett, Charlie Munger and Phil Fisher, a concentrated investment is seen to create more wealth to investors, rather than spreading out investment over a larger number of stocks.
Leading brokerage Motilal Oswal has looked at "Focused Investing" in its 21st Annual Wealth Creation Study, where it highlights the importance of power allocation in creating wealth. It also stated findings on how investors could get higher returns by putting a larger share of money to fewer stocks.
Unlike the past 20 studies that focused on "what to buy," the recent study focused on the principle of "how to buy."
By using hypothetical example of 10 stocks, the study explained the impact of allocation to the performance of a portfolio.
The core of the study was explained by Business Standard. According to the report, allocating funds in different proportion to those 10 stocks will give returns as low as -8.5% to as much as 18.5%.
Raamdeo Agarwal, the joint managing director of Motilal Oswal Financial Services, explained how investors can fetch exceptional returns.
"Rakesh Jhunjhunwala made it big because of his three big investments namely Crisil, Titan and Lupin, which have delivered phenomenal returns for him," he said.
He also cited another case where a bigger allocation in Eicher Motors in Motilal Oswal PMS' fund delivered higher returns than a scheme from Motilal Oswal AMC.
Motilal Oswal's study stated that the key factors to the success of focused investing include defining the portfolio goals, superior stock selection capabilities, and rational allocation. The said factors must be followed and monitored consistently.
"Disciplined investment practice should lead to exceptional returns rather than acceptable returns," said Agarwal.
The study also warned investors of the downsides of focused investing. Investors must be careful not to commit mistakes such as over-allocation, staying with winners/losers for longer than desired periods, among others. It also noted that opportunities to bet big are not frequent.