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The Hazards of Diversification - Stockscores Perspectives for Sept 14 2026
In This Week’s Issue:
- Special Videos – What I Have Learned from 37 Years of Trading
- Market Outlook – Oil Creating Problems
- This Week’s Market Minutes video – When Will Oil Prices Come Down?
- Trader Training – The Hazards of Diversification
- Strategy – Stockscores Simple
Special Videos – What I Have Learned from 37 Years of Trading
I am in the midst of a special video series on what I have learned from 37 years of trading, Make sure you check these out, they are proving to by my most popular videos ever.
After 37 Years of Trading Stocks, These Simple Things are What Work
After trading stocks for 37 years, I have condensed my approach down to a few simple concepts that can fit on a post-it note. Starting with the building blocks of chart patterns, I outline these concepts, what they say about buyer and seller intentions and how to use these to find good day, swing and position trading opportunities. Whether you are a beginner trader or have years of experience, these concepts must be understood.
CLICK HERE TO WATCH ON YOUTUBE
After 37 Years of Trading Stocks, This is How I Manage Risk
Controlling stock trading and investing losses and maximizing profits starts with a sound plan for risk management. In this lesson, I show simple concepts to manage risk effectively and avoid the common mistakes that cause most traders and investors unnecessary stocks in the markets.
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NEW - After 37 Years of Trading Stocks, This is How I Sell
Most stock investors and traders struggle with the sell decision. After 37 years of trading stocks, I have 5 important principles that help me pick the right time to sell . Learn these concepts plus the often overlooked time frame concept that most traders get wrong.
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Market Outlook – Oil Creating Problems
High oil prices raise inflation which pushes the bond market down and interest rates up. This is bad for stocks, particularly small caps which are underperforming the large cap stocks. However, Oil is at a level where it should reverse which will be supportive for stocks, particularly small caps. The strong season for stocks tends to run from October till May so the funk that the market has been in for the last six weeks should start to turn soon.
This Week’s Market Minutes Video – When Will Oil Prices Come Down?
High oil prices are having an effect on the stock and bond markets. When will Oil prices start to come down? I show you what to look for as a signal that prices are set to pull back. Plus, my regular market analysis and the trade of the week.
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Commentary – The Hazards of Diversification
One of the most widely accepted principles in investing is diversification.
The traditional advice is simple: don't put all your eggs in one basket. Spread your money across many stocks, sectors and perhaps even different asset classes so that a problem with one investment will not have a significant impact on your overall portfolio.
There is considerable merit to this approach. Diversification is an effective way to reduce company-specific risk.
However, diversification comes with a cost that investors often overlook.
The more diversified you become, the more your performance is likely to resemble the market average. That may be perfectly acceptable if your objective is simply to participate in the long-term growth of the stock market. But if your objective is to consistently outperform the market, excessive diversification can actually work against you.
Consider what happens as you add more stocks to a portfolio. If you own five stocks, the performance of each matters significantly. If one of those stocks doubles, it can have a meaningful impact on your portfolio.
If you own 100 stocks, one great performer matters much less. As the number of stocks increases, the portfolio increasingly begins to resemble the market itself. Your winners are offset by your laggards, and your returns tend to migrate toward the average return of the asset class in which you are investing.
This is not necessarily a bad outcome. For most investors, earning something close to the market's return over a long period of time is a very good result. The problem arises when investors pay someone significant fees to construct a diversified portfolio that looks remarkably similar to an index. At that point, the investor has essentially purchased an expensive version of the market.
The evidence demonstrates how difficult it is for active managers to overcome this problem. In 2025, 79% of actively managed U.S. large-cap funds underperformed the S&P 500. The numbers are even more striking in Canada. Over the 10 years ending in 2025, 98.8% of Canadian equity funds underperformed their benchmark.
If your portfolio is going to behave like the index, it makes little sense to pay someone 1% or 2% a year to manage it.
If diversification is your primary method of managing investment risk, a low-cost index fund may be the most rational way to implement the strategy. You get broad diversification, very low costs and returns that should closely approximate the market index being tracked.
There is a mathematical reality to investing that is difficult to escape.
You cannot significantly outperform the market while owning the market.
To achieve returns that are meaningfully different from the benchmark, your portfolio must also look meaningfully different from the benchmark.
That generally means concentrating capital in the stocks, sectors or themes where you believe the greatest opportunities exist.
This does not mean putting your entire portfolio into one speculative stock.
It means recognizing that when you have an edge, you have to allocate enough capital to that edge for it to matter. Many of history's most successful investors have done exactly that.
Warren Buffett is often associated with long-term investing, but Berkshire Hathaway's stock portfolio has historically been far more concentrated than many investors realize.
At the end of 2025, Berkshire reported that its five largest publicly traded stock holdings represented approximately 65% of the value of its equity securities. Those positions included American Express, Apple, Bank of America, Coca-Cola and Chevron.
This is hardly the traditional version of diversification.
Berkshire's results demonstrate what concentration in exceptional investments can accomplish. From 1965 through 2025, Berkshire's per-share market value compounded at approximately 19.7% annually, compared with 10.5% for the S&P 500 including dividends.
The difference may not sound enormous on an annual basis, but compounded over decades it becomes extraordinary.
Berkshire's cumulative gain from 1964 through 2025 was more than 6 million percent, compared with approximately 46,000% for the S&P 500.
Buffett's philosophy has generally been to wait for exceptional opportunities and then make them meaningful when they appear. The lesson is not that everyone should copy Warren Buffett's stocks. The lesson is that your best ideas have to matter.
One of the biggest misconceptions about concentrated investing is that the only way to control risk is through diversification. There is another way; control the size of your losses.
This is particularly important for traders. Before entering a trade, know where you are wrong. If the stock violates that level, get out. Never let a small loss become a big one
This is where trading and investing discipline become especially important.
Investors often justify holding losing stocks with statements like:
"It's a great company."
"I'm investing for the long term."
"It will eventually come back."
"The market is wrong."
Perhaps.
But the market does not care what you paid for the stock. A small loss is simply feedback that your expectations may have been wrong. A very large loss usually means you received that feedback and chose to ignore it. Great investors change their minds. They sell, they move capital from investments that are not working to opportunities that are. If you are going to concentrate your portfolio, this ability becomes even more important.
There is nothing inherently wrong with diversification. For an investor whose goal is to participate in the long-term growth of the market with minimal effort, broad diversification through low-cost index funds is an excellent strategy. But understand what you are choosing. If you want to beat the market, you must do something different from the market. That means developing an edge, identifying where the best opportunities exist and having the conviction to allocate meaningful capital to them.
But concentration must always be paired with discipline. You don't manage risk simply by owning more stocks. You can also manage risk by ensuring that when you are wrong, you lose very little.
Concentrate your capital in your best opportunities—and never allow a small mistake to become a big loss.
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