Yesterday Shopify was the target of a vicious and largely unproven negative report about its supposedly aggressive sales practices.
This report was written by a well known US short seller, Andrew Left and his website Citron. It is obvious that this report was written to make the stock go down in order to make a fast buck. It should be mentioned that short sellers frequently focus on high valuation stocks that are vulnerable to a price correction.
Hopefully in future short sellers like Mr. Left and others will be investigated for slanderous research with the sole intent of making a profit.
However the lesson we can all learn from this is the following:
Never have too large an investment in any one stock. Diversify your holdings.
For high valuation stocks like Shopify, Amazon, Nvidia and others it is even more important to properly diversify by having no more than 1.5 – 2% in any one security.
When high valuation stocks experience disappointing earnings, the share price falls based on both lower earnings and a lower PE ratio.
In conclusion own at least 30-35 names in your equity component of your portfolio with any one stock representing no more than 3% of the total. In this regard you will never get into trouble and the volatility of your investments will be much lower.