How Many Stocks Should You Own?

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#1
http://www.safalniveshak.com/how-many-st...d-you-own/

“Never put all your eggs in one basket.” ~ Proverb

“Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket.” ~ Andrew Carnegie

The fight of putting all your eggs in one basket and not doing so seems as old as the egg itself.

The story is the same when it comes to diversifying (eggs in many baskets) or concentrating (eggs in very few baskets) your investment portfolio.

So if you are grappling with this question – “How many stocks should I own to make a diversified portfolio?” – don’t worry for you are not alone in struggling with this question.

In this post, I will try to bring together a few theories on this topic of “concentration versus diversification” and see where they can lead us to.
Let’s start from the start, and see what the father of value investing, Ben Graham, had to say on this subject.

Diversification Vs. Concentration
In the fifth chapter of The Intelligent Investor, titled “The Defensive Investor and Common Stocks”, Graham lays down the foundation for picking stocks under a section titled – Rules for the Common Stock Component.

Here is what he wrote…

There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.

He added…

Each company selected should be large, prominent and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.

So Graham advises you to have anywhere between 10 (not less) and 30 (not more) companies in your portfolio

In 1952, noted economist Harry Markowitz supported Graham’s view and wrote that it is inefficient to put a large holding in just a few stocks, and that investors should diversify across a large number of stocks. He wrote…

Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim.

This was in contrast to what John Maynard Keynes had said much earlier in 1934…

As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.

It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.

One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.

Warren Buffett supported Keynes view, and included in his letter to shareholders of Berkshire Hathaway in 1991 this very quote from the economist.

It was Philip Fisher who taught Buffett the benefits of focusing on just a few investments. He believed that it was a mistake to teach investors that putting their eggs in several baskets reduces risk.

The danger in purchasing too many stocks, he felt, is that it becomes impossible to watch all the eggs in all the baskets.

As per Fisher, buying shares in a company without taking the time to develop a thorough understanding of the business was far more risky than having limited diversification.

Here is what Buffett wrote in his 1966 letter to shareholders…

Anyone owning such numbers of securities (like 100) after presumably studying their investment merit (and I don’t care how prestigious their labels) is following what I call the Noah School of Investing – two of everything. Such investors should be piloting arks.

While Noah may have been acting in accord with certain time-tested biological principles, the investors have left the track regarding mathematical principles. (I only made it through plane geometry, but with one exception, I have carefully screened out the mathematicians from our Partnership.)

On the point of “over-diversification”, Buffett quoted the academician Billy Rose, who said…

You’ve got a harem of seventy girls; you don’t get to know any of them very well.

In favouring concentration, Buffett wrote this in 1993…

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury.

He also wrote…

…if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk.

I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices -the businesses he understands best and that present the least risk, along with the greatest profit potential.

In the words of the prophet Mae West: “Too much of a good thing can be wonderful.”

Seth Klarman wrote this in Margin of Safety…

Even relatively safe investments entail some probability, however small, of downside risk. The deleterious effects of such improbable events can best be mitigated through prudent diversification.

The number of securities that should be owned to reduce portfolio risk to an acceptable level is not great; as few as ten to fifteen different holdings usually suffice.

Diversification for its own sake is not sensible. This is the index fund mentality: if you can’t beat the market, be the market.

Advocates of extreme diversification – which I think of as Portfolio Management and Trading over-diversification – live in fear of company-specific risks; their view is that if no single position is large, losses from unanticipated events cannot be great.

My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings. One’s very best ideas are likely to generate higher returns for a given level of risk than one’s hundredth or thousandth best idea.

Buffett’s “Twenty Punches”
Warren Buffett is supposed to have said…

I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime.

And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.

The problem with most of us investors is that, too often, we scatter money around while saying to ourselves, “Okay, let me throw a little money in this stock and little in that stock and then see what happens. At least, one of the stocks will work!”

Now, that’s a sure shot road to a hell lot of risk – first you don’t know where you are scattering your money, and then you think you are investing while the reality is that you are speculating in the hope of hitting the “right” stock.

Buffett wrote this in his 1993 letter to shareholders…

Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire’s capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically.

Therefore, we adopted a strategy that required our being smart – and not too smart at that – only a very few times. Indeed, we’ll now settle for one good idea a year. (Charlie says it’s my turn.)

I Go with Peter Lynch
Just to sum up, here is what the legends have advised on how many stocks you should own in your portfolio…

Ben Graham – 10 to 30…with each company being large, prominent and conservatively financed.
John Keynes – 2 to 3…companies which one thinks one knows something about and in the management of which one thoroughly believes.
Warren Buffett – 5 to 10…if you are a know-something investor, able to understand business economics and to find sensibly-priced companies that possess important long-term competitive advantages.
Seth Klarman – 10 to 15…better off knowing a lot about a few investments than knowing only a little about each of a great many holdings.
I personally hold around 12 to 15 stocks in my portfolio at a given point in time. The maximum I have had over the last ten years is 20, which I thought was too hard to manage given my limited attention span.

Anyways, if you don’t remember Buffett’s, or Graham’s, or Keynes’s, or Klarman’s thoughts on concentration versus diversification, I am sure you would remember Peter Lynch who said…

Owning stocks is like having children, don’t get involved with more than you can handle.

I have nothing to add!

What about you? How many stocks do you own in your portfolio? And is there a specific philosophy you practice on diversification versus concentration? Let the tribe know in the Comments section below.
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#2
Also depennds on the cash level.

10-15 stocks with 50% cash is different from
10-15 stocks with zero cash or margin financing.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#3
depends on your character and style I guess
but yeah if you wanna be rich, be very focused
if you just wanna maintain your wealth, still diversified (its hard to go wrong buying the index, you dun beat or lose to the market)
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#4
Buffett’s “Twenty Punches”
Warren Buffett is supposed to have said…

I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime.

And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.




The above is the most well said of all ^^
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#5
Q : "How Many Stocks Should You Own?"

A : Just enough not to make you lose money...

Tongue
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#6
My personal opinion in another thread of similar nature:

http://www.valuebuddies.com/thread-3899-...l#pid65444
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#7
i think this straightforward question has an equally straightforward answer.

The number of stocks one should own is should be what he is comfortable with. There is little point to own a lot of stocks just for the same of risk diversification and imo, few pple can even achieve 10% CAGR with 10 or more stocks.
Similarly, if one wants to become rich fast and he concentrates his portfolio to just 2-3 stocks but ended up stressful watching them like a hawk and losing sleep in the process, then surely life has more meaning than just doing the latter?

So i think it's very important to invest within one's level of competence and comfort and cash level (3 c's).

I think equally important is to realise or not forget that the stock market constitutes just ONE investment entity. The others are physical property, gold, royalties and what have you..etc.

So the average person owning a 500k HDB, with 100K planning to invest in the stock market and used it to buy 10 different stocks, has merely allocated some 10k/600k or some 2% of his net worth in a counter. What difference to overall net worth does it make even if it this particular one counter double bags?

feel free to comment.
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#8
IMO, we should only take the investible sum rather than 'networth' as cited. More over, the $500K property may not be fully paid. Smile

So, $100K is his investible sum instead of $600K

Quote:So the average person owning a 500k HDB, with 100K planning to invest in the stock market and used it to buy 10 different stocks, has merely allocated some 10k/600k or some 2% of his net worth in a counter. What difference to overall net worth does it make even if it this particular one counter double bags?
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#9
(11-11-2013, 05:56 PM)gautam Wrote: The number of stocks one should own is should be what he is comfortable with. There is little point to own a lot of stocks just for the same of risk diversification and imo, few pple can even achieve 10% CAGR with 10 or more stocks.
Similarly, if one wants to become rich fast and he concentrates his portfolio to just 2-3 stocks but ended up stressful watching them like a hawk and losing sleep in the process, then surely life has more meaning than just doing the latter?

Indeed this is very true. In many sense, investing is a personal journey - one will be surprised how much introspection it involves and to be successful, one needs to realise what one's risk appetite really is, and then invest with the right style. In the first edition of "Market Wizards", the interview with Ed Seykota threw out an observation: "Everyone gets what they want out of life", which I find very true.

Only by investing with the right personal style then can one be at peace with oneself.
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#10
Know yourself. Know when you are bullsh**ing yourself. Coz investment is also a mental game.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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