If you own shares that represent a large percentage of your overall portfolio, you have a concentrated stock position.
The GameStop Saga
On March 30, 2020 GameStop (GME) was a declining video game retailer with a stock price of just $2.57 a share. GameStop appeared to be suffering the same fate as once powerful retailer, Blockbuster Video, with a similar share price decline. 2,100,000 shares of (GME) at $2.57 per share was worth roughly $5,250,000 on March 30, 2020.
Just 10 months later the stock hit an all-time high of $483 on January 24, 2021, and that same 2,100,000 share position had now swelled to a value of $1,014,300,000 – yes, you read the decimal point correctly, that’s over $1 Billion.
It doesn’t matter how it happened – a blend of aggressive day traders fueled with stimulus checks and no cost trading on the Robinhood platform, forcing some very large hedge funds to unwind their short positions (as has been suspected). It only matters that anyone who owned $5mm worth of (GME) now had over $1 Billion dollars of value.
What would you do?
Most people who do not own the stock look at this situation and say, “this is total lunacy, and you should get out as fast as you can before it goes back to $2.57.” But it wasn’t much less crazy when the stock abruptly reached $50, $100, $200, $300. Based on commonly used financial metrics, none of these prices made sense either. It was only in hindsight that those price levels seemed merely “outrageous” versus the “really, really, really outrageous” and the “can it get any more outrageous?” levels of the high $400’s.
What should this teach you about your own concentrated position?
- We never know what the price will be in the future. In no one’s wildest dreams would GameStop stock hit $483 a share 10 months after being at $2.57. And in this specific example, no one has even tried to pretend they knew it was coming. Trying to figure out the future price of any stock is absolutely futile.
- Concentration can create tremendous wealth, if your stock goes up. It may not make any sense, but anyone with $5mm in GameStop on March 30, 2020 had over $1 Billion of value when the stock hit $483. If you took the big bet on one company stock by holding all your shares, congratulations!
- That same wealth on paper can also go away. If the stock price can rise to dizzying heights for no good reason (or even from a plausible, possible good reason) it can also go away, and just as fast.
- Only reducing risk (selling shares) creates certainty for the future. Since we will never know what the price will be in the future, selling some shares as the price increases locks in your long-term wealth no matter what the stock does in the future. The price at the top is just as elusive as finding the price at the bottom. Sell some shares and diversify as the stock rises, and never look back.
You can potentially get rich being concentrated. But you are more likely to stay rich being diversified. And that’s what truly matters.
Disclaimers
Stock prices and dates from Yahoo Finance historical prices. We are not making any specific recommendations regarding any security, investment strategy or estate or financial planning strategies, and you should not make any decisions regarding the forgoing based on the information in this post.