In this edition, we are going to look at the following:

• Portfolio performance

• Additions to the portfolio

• The risk of portfolio concentration

Performance

The portfolio is doing really well, we’re up 49.61% over the past year. A hundred dollars invested in our portfolio at inception would now be worth $174, whereas the same amount invested in the benchmark would only be worth $120.

That is great, but we are building a long-term portfolio. Fortunately, the portfolio has almost reached its third birthday.

If we look at the since inception returns, you will see that the portfolio has returned about 21% per annum versus 7% per annum for the benchmark. The outperformance was 14% per annum. That is a high number, nevertheless it is reassuring to see good performance over a longer time span.

In terms of risk, the portfolio beta is 0.93, meaning that it is less volatile than the market, which has a beta of 1.

Additions to the portfolio

Now lets address the elephant in the room. We added to our holdings of Nvidia and Novo Nordisk in June and that has increased their combined weightings in the portfolio to 67%.

The result is that we’ve increased the portfolio risk and heavily exposed ourselves to those company’s. Let’s look at why we did that.

Why did we increase the portfolio concentration?

We added capital to the portfolio. That left us with three choices:

1. Buy new stocks that were not in the portfolio.

2. Buy everything in the portfolio in proportion.

3. Buy what we think is best and skew the portfolio.

Buying new stocks would have been great, but at the moment US markets are very highly priced. There were a few companies that looked interesting, but nothing that we really wanted to buy.

The same problem also prevented us from buying everything in proportion. After all, why buy companies you think are very highly valued? That could result in average future performance.

That left us with the last option, which was to skew the portfolio. Based on our analysis, we think that Nvidia and Novo Nordisk have tailwinds and large markets to expand into.

We are of the opinion that Nvidia has developed an ecosystem that will see them able to compete successfully for some time to come. They don’t just sell microchips. They offer companies a way to build and operate artificial intelligence factories. Once you’re in their ecosystem, there will be barriers preventing you from moving to competitor solutions. Novo Nordisk serves the diabetes and weight loss market. These are clearly large and growing markets. As the world prospers, people eat more and exercise less - unfortunately the consequences are negative, but Novo is helping people to live healthier.

So we skewed the portfolio and bought those two companies.

Conclusion

In time to come, we will add more capital and the weightings will even out a bit. Until then, bear with us, as we ride the rollercoaster of Nvidia’s volatile stock price. I’m sure we will learn a few lessons from that.

I don’t know how you manage your money, but be cautious with concentration. If these two stocks crash, two-thirds of our portfolio will be wiped out. That is why diversification can be a good thing.

There are many ways to diversify. You can put some money in an actively managed fund, you can buy passive indexes or you can run a core-satellite portfolio.

A long, long time ago, we discussed how to design a core-satellite portfolio (oops, we broke these guidelines 🫢). Briefly, you own a very diversified portfolio, then add a few stocks that you want to own. If you did that, a portfolio like ours would not appear as risky.

I would like to hear what you’re up to.

DM me on social media or email me.