Seven Single-Stock Portfolios Tested: Surprising Results Revealed
In the world of investing, the strategies of concentration versus diversification continue to spark discussion. The late Charlie Munger, known for his partnership with Warren Buffett at Berkshire Hathaway, advocated for concentration in stock holdings. He suggested that intelligent investors might achieve greater returns by focusing on fewer stocks rather than spreading their investments thinly. However, this approach may not suit every investor’s capabilities.
Testing Seven Single-Stock Portfolios
A recent analysis examines seven single-stock portfolios to evaluate their performance compared to diversified strategies. This study focuses on Canadian value, dividend, and low-volatility portfolios tracked regularly in The Globe and Mail. Over 26 years, these diversified portfolios have significantly outperformed market indices by concentrating on 10 to 20 carefully selected stocks from the top 300 on the Toronto Stock Exchange (TSX).
Portfolio Strategies Deconstructed
- Screaming Value: Selects 10 stocks with the lowest EV/EBIT ratios.
- Free Cash Portfolio: Chooses the 10 stocks with the lowest EV/FCF ratios.
- Dividend Monster: Picks stocks with above-median yields, focusing on the 10 with the highest one-year returns.
- Pink Lemonade: Begins with stocks that have low price-to-earnings (P/E) ratios and selects the top 10 over six months.
- Stable Dividend: Focuses on the 20 dividend stocks with the lowest volatility over 260 days.
- Frugal Dividend: Starts with 50 dividend payers with low volatility, selecting the 10 with the lowest P/Es.
- Stable High-Yield: Chooses the 10 highest-yielding stocks, contrasting with the Frugal Dividend portfolio.
Evaluating One-Stock Versus Multi-Stock Portfolios
Each of these portfolios was tested alongside a single-stock version, retaining the same criteria but selecting one stock instead of multiple. The results revealed a mixed performance. Five out of the seven single-stock portfolios lagged behind their multi-stock counterparts but surpassed the broader market index.
However, the volatility of the one-stock portfolios was notably higher, with variations ranging between 82% and 140% more volatile than the diversified portfolios. Only the utility-heavy Stable Dividend portfolio displayed relatively lower volatility at 64% more compared to its multi-stock version.
Investor Takeaways
The findings suggest a cautious approach towards single-stock investments. While some portfolios performed well, the higher volatility indicates increased risks. Even seasoned investors like Munger and Buffett have encountered pitfalls in single-stock selections.
This analysis serves as a reminder that while concentrating investments may yield substantial returns, diversified strategies historically provide a more stable pathway for most investors.
