Episode 363 - The (Underappreciated) Risk of Individual Stocks

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Jun 26, 2025

Discover the hidden risks of holding concentrated stock portfolios. The conversation dives into why diversification is crucial, revealing that individual stock returns are often disappointing. The hosts address psychological biases that lead investors to make risky choices and highlight the strong case for indexing in the current market. Plus, hear about the growing trend in advisor adoption of index investing and the playful debates sparked in their community. It's an insightful reflection on the reality of stock picking versus safer, systematic investment strategies.

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ANECDOTE

Nortel Client Tax Dilemma

Cameron Passmore shares a client story about a huge concentrated Nortel stock position.
High tax costs delayed selling, leading to losses when the stock collapsed after selling at the peak.

INSIGHT

High Rate of Stock Catastrophic Losses

44% of Russell 3000 stocks from 1980-2020 suffered unrecovered catastrophic losses of 70% or more.
This reveals how risky owning individual stocks can be compared to a diversified portfolio.

INSIGHT

Stocks Show Positive Skewness

Most stocks underperform; mega winners are few but perform exceptionally well.
Investors tend to overweight chances of holding mega winners, underestimating the likelihood of losers.

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What if holding just a few “winning” stocks is riskier than it seems? In this episode, Ben and Cameron explore the hidden dangers of concentrated portfolios and unpack the data that makes a strong case for diversification. Drawing from research by Hendrik Bessembinder, J.P. Morgan, and others, Ben lays out the harsh reality behind individual stock returns: the odds are stacked against long-term success. From skewed return distributions and catastrophic losses to behavioral traps like the endowment effect and familiarity bias, this conversation breaks down why most stock pickers lose—and why diversification remains the only “free lunch” in investing. Whether you're holding onto a single stock for tax reasons, overconfidence, or just inertia, this episode is a must-listen reality check on portfolio risk. They also share thoughts on advisor adoption of indexing, the slow shift in Canada, and how a Rational Reminder YouTube video sparked debate between stock pickers and indexers in the comments section. For anyone navigating concentrated positions—voluntarily or otherwise—this episode is packed with data-driven insight and real-world takeaways.

Key Points From This Episode:

(0:00) Welcome to Episode 363: catching up in person and the value of working together in-office.

(1:07) Why advisors are slow to adopt indexing—and how culture, compensation, and inertia play a role.

(2:58) Demand is rising: indexing awareness among young advisors and investors continues to grow.

(4:08) Main topic: The hidden risks of individual stock concentration.

(5:40) The Nortel example: taxes, timing, and the illusion of "free" stock.

(6:51) Individual stocks are far riskier than most people realize—especially recent winners.

(9:09) Most investors hold between 3–7 stocks. Why that’s a problem.

(11:29) Portfolio concentration = fugu prepared by an amateur chef.

(12:45) Diversification reduces risk without reducing expected return.

(14:04) JP Morgan’s “Agony & Ecstasy” report: 44% of stocks suffer catastrophic losses.

(16:26) Why investors overweight the chance of a big win and underweight the risk of losses.

(17:07) The reality of skewed returns: a few big winners, many losers.

(24:35) The 2023 study on concentrated stock positions: recent top performers underperform the most.

(28:40) How many stocks do you need for real diversification? Way more than 20–30.

(32:00) Wealth dispersion and the long-term consequences of concentration.

(35:24) Why even 100-stock portfolios only beat the market 47.5% of the time.

(36:55) Taxes, control, and psychological hurdles make diversifying even harder.

(38:14) Diversification depends on your preference for risk and skewness—but beware the odds.

(39:08) Behind the scenes: Ben’s research process and content development workflow.

(43:14) Ben’s guest appearance on Morningstar’s The Long View.

(44:00) Meetups, t-shirt scarcity, and what’s next for PWL outreach.

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/`

Episode 346: Hendrik Bessembinder - https://rationalreminder.ca/podcast/346

Papers From Today’s Episode:

‘The Agony & The Ecstasy’ - https://privatebank.jpmorgan.com/nam/en/insights/latest-and-featured/eotm/the-agony-the-ecstasy

‘Why Index Works’ - https://www.top1000funds.com/wp-content/uploads/2017/07/Why-indexing-works.pdf

‘Underperformance of Concentrated Stock Positions’ - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

‘How Many Stocks Should You Own?’ - https://ndvr.com/journal/how-many-stocks-should-you-own

‘Fund Concentration: A Magnifier of Manager Skill’ - https://discovery.researcher.life/article/fund-concentration-a-magnifier-of-manager-skill/67964b7ccc9d3cae87761f6ef19241a0