- Michael Allison, CFA
- Jun 15
- 2 min read
Updated: Jun 16
By Michael Allison, CFA
This week’s Chart comes to us courtesy of my friend, Brent Sullivan at Tax Alpha Insider and his interpretation of Antti Petajisto’s paper, Underperformance of Concentrated Stock Positions.
The wealth building power of concentrated stock positions is often validated by personal success stories: an early Tesla bet, equity in a startup, or a long-held family position in Apple. But as the Chart shows, time turns even the brightest banana brown. Over longer horizons, single-stock risk compounds, not unlike the banana’s journey to mush.
Petajisto’s paper provides the data behind the visual. Analyzing ~3,000 U.S. stocks from 1926–2022, Petajisto finds that the median ten-year return on a single stock lags the market by 7.9%, and it’s even worse, –17.8% for stocks that were prior five-year winners. That means most long-held “winners” eventually underperform. Since WWII, that’s been true 93% of the time .
Why? Skewness. Most stock market returns come from a small handful of mega-winners—think Amazon, Apple, or Nvidia. While the upside on a single stock is theoretically unlimited, the downside is capped at –100%. The result is a long right tail but a mediocre median. This leads to a paradox: the average return looks attractive, but the median experience is underwhelming for the concentrated investor.
This is where diversification earns its role in helping preserve wealth. It doesn’t just reduce volatility, it boosts the probability of success. By spreading one’s holdings across sectors, styles, and individual names, investors are more likely to own the next generational winner while limiting the downside risk from those that never recover.
For those who have built wealth through concentration—entrepreneurs, early employees, or just lucky and patient holders, diversification isn’t a repudiation of what got you here. It’s the next logical step. Concentration might build wealth, but diversification is what helps you keep it.
Interested in reading more of Mike's weekly newsletters? Click below to view The Sunday Drive.
Comments