My Big Tech Dilemma
Portfolio diversification versus opportunistic sector overweight
Portfolio diversification is a key principle in investing that refers to the practice of spreading your investment dollars across a variety of sectors, industries and geographies in order to reduce the overall risk of a portfolio. The idea is that by not putting all of your eggs in one basket, you can mitigate the impact of any one investment performing poorly, as the other investments in your portfolio may offset those losses.
On the other hand, by being opportunistic in investing, you can take advantage of specific market conditions or situations that present themselves in order to potentially earn higher returns. Right now we are in precisely such a position. Entering 2022 I had a very high percentage of my portfolio in Tech stocks, predominantly Big Tech (you can read up on my 2022 Portfolio review here). Throughout 2022 I noticed that I would like to diversify my portfolio away from a very large “tech” (even though Tech isn’t really a sector, you know what I mean probably) portion, to compounders in all sort of sectors. Technology companies often face problems like frivolous spending and excessive stock-based compensation, Features that aren’t present in most sectors, thus presenting opportunities.
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Even though I want to diversify my portfolio, I’m been buying a lot of Microsoft MSFT 0.00%↑ and Amazon AMZN 0.00%↑ last week (together with some Danaher DHR 0.00%↑ to be fair, which isn’t “tech”). These two stocks now account for 20% of my portfolio and I also have smaller stakes in Google GOOG 0.00%↑ , Salesforce CRM 0.00%↑ and Veeva Systems VEEV 0.00%↑. Generally, I’d love to have high-quality companies like Watsco WSO 0.00%↑, Copart CPRT 0.00%↑ or Sartorius Stedim DIM 0.00%↑ higher up in my portfolio, but right now Big Tech offers great opportunities in my opinion. Microsoft is among the best companies in the world and is finally at a fair valuation again and Amazon at $800 billion is a steal, if they can control costs.
I am kind of in a dilemma here. I will most likely continue my normal DCA into TXN 0.00%↑, WSO 0.00%↑, $ADYEN and CSU 0.00%↑ and deploy most of the additional capital into these big tech names which all trade significantly below their 200 day moving average. Over the long term I still intend to reduce my “tech” portion of the portfolio, but in the short-term I could see the size of them grow in my portfolio.
What do you think about this topic? Are you in the same or similar predicament? Let me know. Cheers.
Curious you did not mention any ASML. I haven't yet thought through the dilemma but I feel like I'm having the same discomfort. Will get back to you as soon as I make up my mind!
Hi HeavyMoat. I’m the same person who recently blatantly asked for an inverse DCF on WSO on SA :). Thank you for all the write-ups which I used to source ideas without the slightest gilt. Seriously though, I tried to find a paid subscription tier on your Substack so that I can kind of overcome the gilt of all reading all your free yet super insightful articles, but it seems you are too generous to have a pay-wall. May I have a go on your tech dilemma here. If you are a big institutional investor, like pension fund or university endowment or insurance company (unless you are Berkshire Hathaway), you would be in the business of asset allocation. And in asset allocation, it pays to invest in equities, fixed income, alternatives, and diversify by geography, by industry. For a lot of these asset allocators, the aim in to “match”. Whether it’s matching liability with asset for duration matching, currency matching, and so on. And further imagine, of the equity allocations, you want to allocate some to “long only tech-focused hedge fund managed by a German national who mainly invests in the US”. That would be you. Now the question becomes if you believe you are the asset allocator or the equity fund manager? This really depends on your aim. If you believe you want to match investment growth with certain goal in life, like retirement or something, or beating certain threshold, then you should think about asset allocation. How much of your wealth are in house, car, cash, tech stocks, fixed income, etc. But if you don’t have that kind of goal, and elect to just invest unconstrained, sector-agnostic, style-agnostic, into equities, then maybe just do what you are doing and forget about asset allocation. For me, I know I have certain percentage of my whole asset into houses and stuff, but I have this portion left for stock investing, in which I just focusing on bottom-up value analysis. This seems to alleviated me from thinking about concentration in any sector or geography or whatever metrics. Sorry about this rumbling so long.