LARGE CAP Stocks are BAD for your Portfolio


Last year, I asked myself the question, what’s wrong with my portfolio? The answer was that I had too many companies in my portfolio. I had 32 companies in my portfolio. Overdiversification is a bad thing. If you have too many companies in your portfolio, your returns will be average. I was able to reduce my holdings to only 17 companies and have been concentrating my positions in some companies. Today, 50% of my portfolio is in 7 companies: $AAPL $FB $JPM $MS $WFC $BRK.B and $TRV .

Today, when I ask myself the question, what is wrong in my portfolio? The answer is obvious. I have too many big companies in my portfolio. Apple is a $800 Billion company, Facebook $500 billions, JPMorgan Chase $400 billions,.. the smallest company in my portfolio is $TIF which has a market cap of about $11 billions.

There are two main problems with having big companies in one’s portfolio: 1. Big companies don’t grow much Apple is a wonderful company. The best stock in my portfolio. But this company will never be able to grow free cash flow by 50% or more per year. This days of outstanding growth are over. That’s why you’ll see Apple returning cash to shareholders through buybacks. They can’t utilize that cash elsewhere in the growth of the company. It is hard to spend $70 billions every year. Every big company faces the same problem even companies like $AMZN and $GOOG which are considered growth stocks. If you want outstanding growth, you need to invest in smaller companies. 2. Big companies are drivers of the market $AAPL $MSFT $AMZN $GOOG $$FB account for 40% of the $NSDQ100 and more than 10% of the $SPX500 . The problem with this is that if you invest in theses companies, you’ll not beat the market. You’ll do what the market is doing.

I won’t say that I made a mistake investing only in big companies. When I was a beginner, the big companies were the only one I knew but now I know much more. And I found much better investments.

Does that mean that I’m going to sell everything? Absolutely not. At the price that I bought $AAPL that was a real bargain and it is still too soon to sell. The company won’t grow by 50% per year but can still grow by 15% per year. The only ways to solve the problem is by investing more in smaller companies or by trimming positions in those bigger companies at the appropriate price. Besides, now I have some “workouts” in my portfolio, namely two arbitrage trades with $CELG and $APC . I’ll do a video later on these workouts to tell you how they can fuel a portfolio especially in a volatile and falling market.

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