Their speculative stocks did very poorly and they sold them. The club has been very successful in its investments in PepsiCo and Coca-Cola . What started out as 25 percent of its cost now is approximately one-third of the value of its portfolio. That's too much concentration in one industry. It should be cut back to 10 percent or less.
Diversification is a recommended strategy for reducing risk.
One can never predict when that unknown torpedo can come out of the dark and smash the price of a stock. A 50 percent drop in price of a stock that is one-third of a portfolio results in a 16.5 percent erosion of value. If the stock is only 10 percent of a portfolio, the hit is only 5 percent of the portfolio's value. Take Browning-Ferris Industries as an example. Then in the September 1990 quarter, EPS dropped 59 percent.