Stocktake: More agony than ecstasy for stock-pickers

Preaching the benefits of a diversified portfolio isn’t fashionable right now. Stories of people striking it rich are everywhere – think of Keith “Roaring Kitty” Gill, who claimed in January his $54,000 (€45,861) GameStop investment had swollen to $48 million (€40.8 million), or anyone who bet big on Tesla (up eightfold in 2020), bitcoin (up tenfold from its 52-week low) or various other skyrocketing assets.

It is easy to forget stock-picking is actually a very tough game. In 2004 JPMorgan's Michael Cembalest published a report called The Agony and the Ecstasy: The Risks and Rewards of a Concentrated Stock Position. An updated version followed in 2014 and version 3.0 was meant to follow in 2024, but Cembalest decided to bring that date forward, given the world is currently "awash in concentrated wealth".

The numbers are stark. Historically, more than 40 per cent of United States companies have experienced a “catastrophic stock price loss”, defined as a 70 per cent decline that is not recovered. About two-thirds of the time, a concentrated position in a single stock would have underperformed a diversified portfolio.

It’s true you can make a fortune if you pick the right stock, but that’s a low-probability bet – since 1980, only about 10 per cent of stocks met the definition of “mega-winners”.