OT: Concentrating a portfolio

Some very simple thoughts about portfolio concentration have been on my mind. Unless you feel like you have something super-insightful to add, please don’t respond on this thread. I probably won’t answer questions or get into a back and forth. A couple years ago, before the new board format I wouldn’t have even posted this, but I think it should be ok now.

The main thing to me about really piling into a position is that it shouldn’t just be for lack of alternatives…it should be when we really see a disconnect in risk and reward. Of course there is a correlation between risk and reward. No way is a company like Apple or Microsoft going to triple in the next year or two…others that are small very well could (we’ve seen it happen). But likewise, the risks to Apple and Microsoft are so much less severe…and mostly they’re incremental, not systemic.

But even though this correlation generally exists, sometimes risk and reward are not perceived correctly by the market. Axon is my #1 position. I think others have more upside, but Axon also has quite a bit! They have large segments of the company in hypergrowth, and their ARR grew 52% YoY last quarter. This is no stodgy 20% grower! But also, I see very little downside. This isn’t a company with a ton of competition (to put it mildly). They seem to have a heck of a moat. They have very steady growth and customers. And the valuation is pretty low…more than reasonable.

Contrast that with Samsara, my second biggest. I think I have close to the amount of conviction in Samsara as with Axon. But Samsara is far more expensive on a multiple basis – that doesn’t mess with my conviction or concern me regarding downside…but it does make me a little tepid on how much upside they might have in the short term. Also consider ELF which is not very expensive, but in which I have less conviction…it’s even lower than Samsara though I feel ELF has more upside. Important point! I think the most important thing when concentrating is conviction (feeling that downside is limited). But I don’t see the point of concentrating into something when the upside seems limited, either. That’s why, unless the upside is off the charts, I trim things when they get very expensive, and even exit things with limited upside AND a high price, like Snowflake.

As example, here’s how I see my port now:


Glancing over this, note that all my top positions have “low downside” (as perceived by me, of course). Also, you can see why Aehr is one of my low allocations. (But you might feel differently about their upside/downside, for sure.) And ELF, despite the upside, won’t get too big for me any time soon. Downside and lack of conviction should be the biggest driver of allocation. And of course things where I don’t see huge long term downside, but I don’t see even medium upside (like Snowflake and TTD – I would say “low upside and low downside” for both) are not in the portfolio at all.

Hope these quick thoughts make sense. If you feel strongly that my identification of a certain company’s upside and/or downside is incorrect, it might be worth a separate thread on that company. I think discussing our beliefs about the upside and downside for our companies is a useful exercise!


PS Obvious question: If Celsius has “med upside and med downside,” why is it below AEHR and ELF (esp AEHR which has “med upside and significant downside”)?

Answer: there are certainly nuances within “med” or “significant” (or “low”) that I didn’t address. Basically to directly address AEHR and CELH, I believe AEHR has more upside AND more downside. Celsius seems just fairly priced, where I could see AEHR getting re-rated up a bit if revenues grow faster than I expect. But it’s close.

The main thing in, both of these (and ELF) are my lowest allocations because I think downside should be the biggest driver of allocation.


Thank you for this insight into your thought process! Keeping a record of my upside/downside thoughts on each company has greatly clarified my investment decisions.

I quickly extended your idea to keeping a record of my thoughts on each stock over time. For example, here is my log for Global-E (GLBE) which is a new position I opened once the price dropped after earnings:

Reward Risk Notes
2023/10/28 Medium High Macroeconomic concerns. Stay away.
2023/11/16 High Low Macroeconomic concerns probably priced in after earnings. Position opened.

I have more detailed thoughts later in the file (I keep one file per stock I invest in), but this lets me see how my thought son the stock are evolving any time adjust my opinion of the upside/downside potential.

I always had this kid of thought when evaluating a new stock but I never took the time to write it down or keep a log of my thought process. I am grateful you took the time to share this insight into how you evaluate your investments!