Beware Those Concentration Risks

Holding too much of a single stock – even if it is a star performer – is never a good idea.

- Schalk Louw

Whether you’re an avid gamer or not, when I mention the name Angry Birds, I’m sure most readers will know exactly what I’m talking about. This game, with its tiny birds flying through the air screaming, caused such a fuss that it not only triggered the production of actual toys and branded food products, but also a big-screen film.

In fact, it was so big that the creators of the Angry Birds trademark, Rovio Entertainment, listed on the Helsinki Stock Exchange in September 2017 at an entry price of €11.50 per share. As with most trends, however, both children and adults lost interest in Angry Birds, and Rovio released a profit warning on 22 February, which caused an almost immediate 50% decline in the share price (to €4.90, a 57% decline in total since its listing five months ago).

Indeed, the Angry Birds and Pokémon GO heroes of today may easily become the zeros of tomorrow.

You may wonder how this is relevant to this issue’s subject and investors in South Africa specifically. I would like to tell a cautionary tale about some of the less obvious risks, like concentration risk, when it comes to investing in the stock market.