47 - Forced Diversification and Illiquid Stocks

Mental Models discussed in this podcast: Liquidity Diversification Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Forced Diversification and Illiquid Stocks The full show notes for this episode are available at https://www.diyinvesting.org/Episode47 Illiquid Stocks Offer the chance for higher returns with lower risk Less competition from professional investors Forced Diversification Can be caused by either: Insufficient stock liquidity Insufficient Conviction in High-Quality Ideas Don't dilute your returns with low-quality ideas held in too large of a position size My goal: Hold 5 stocks at 20% each.  Currently, I am unable to achieve this goal because I do not have five ideas that are good enough to be worthy of a 20% position.  Summary Illiquid stocks offer substantial opportunity, but can also lead to an inability to purchase as many shares as you would like. This situation, along with a lack of good ideas, can lead you to rationally diversifying your portfolio more than intended. Cash has a high opportunity cost, so it is okay to build small positions in companies that are still high quality, but may not currently trade at wonderful prices.  However, stick to your strategy and don't build full positions in companies if they do not meet both your quality and price standards.