Most people intuitively understand the idea of concentration risk. You know the line: don’t put all your eggs in one basket. Or even just five. Spread those risks, diversify, build in redundancy and have a back-up plan.
But why don’t we ever hear about ‘concentration reward’? Perhaps we do: one pithy idiom holds that investors should “concentrate to get rich, diversify to stay rich”. And maybe, deep down, we are all drawn to the idea of betting the farm on one huge positive outcome. Without such instincts, Las Vegas doesn’t exist.
Then again, nor would charts like the one below. It shows the performance of our Contrarian Value stock screen, whose selections have been refreshed each year since 2011. Unlike many of the screens we follow, this is measured in two ways: via a well-diversified 20-stock version, and a super-concentrated five-share one.