A diversified stock portfolio or a concentrated one? An easy pick

Investing success takes both luck and skill—and diversification gives the latter a larger role to play

- DEVINA MEHRA

If you talk to people who have read so-called investment gurus or at least summaries of their books, they will earnestly tell you that the way to outperform the market is to have a concentrated portfolio of so-called high-conviction bets. The logic goes something like this: If you are buying a number of stocks for your fund or portfolio, then you are replicating the market. How then can you do better than it?

Most market players, especially in the portfolio management services (PMS) industry, pitch themselves as providing value because they buy only around 15 stocks. This is also supposed to distinguish them from mutual fund schemes, which hold a large number of stocks.

The question is: Is it possible to outperform with a diversified portfolio? And how likely are you to do it?

First, the data. In most years, more than 50% of listed stocks outperform the market index. The average is more like 55%. The numbers are pretty similar whether you look at India or other markets like the US—wherever a large number of stocks are traded.

There are roughly 750–800 stocks listed in India with market capitalization greater than ₹1,000 crore and each year, close to 400 of them outperform the market.

If you are holding, say 40 or 60 stocks, and they are mainly from this outperforming bucket, your portfolio as a whole will outperform the index. You do not need to be super concentrated to ensure outperformance.