The Risk of (Individual) Stocks

About this Video

• Video Title: The Risk of (Individual) Stocks
• Channel: Ben Felix
• Speakers: Ben Felix
• Duration: 00:19:11

Introduction

This video explores the risks associated with holding concentrated positions in individual stocks. Ben Felix argues that despite the common belief that diversification is unnecessary for skilled investors, individual stocks are significantly riskier than many investors realize, and that concentrated portfolios are more likely to result in catastrophic losses than life-changing gains. The video examines research supporting this claim and discusses strategies for diversification.

Key Takeaways

• Individual stocks are inherently riskier than many believe: Studies show a high frequency of catastrophic losses (70% or more decline never recovered) among individual stocks, even within successful sectors. A significant percentage of individual stocks underperform the market or produce negative absolute returns over long periods.
• Diversification is crucial: The video challenges the commonly cited 20-30 stock diversification rule, advocating for a much larger number of stocks (around 250) to mitigate the risk of catastrophic losses and significantly improve long-term wealth outcomes.
• Past performance is not indicative of future success: Stocks that perform exceptionally well in the short term are not guaranteed to continue this trend; in fact, they are more likely to underperform.
• Behavioral biases affect investment decisions: Investors often overestimate their ability to select winners, influenced by familiarity, the illusion of control, and other cognitive biases that lead to concentrated and underperforming portfolios.
• Tax implications and psychological barriers exist for diversification: High tax liabilities associated with selling appreciated concentrated holdings can be a major impediment to diversification. Overcoming psychological biases like the disposition effect and the status quo bias is also crucial.