Portfolio Size

Someone just asked something I would like to post since it is a question I have heard several times and I always basically respond the same:

***********

Hi JRV,

“The average small investor needs a certain amount of diversification, but he can get it for himself by buying 5 share lots instead of 100 share lots” (pg 71, Where are the customers’ yachts; Fred Schwed Jr.

Buffett and Fisher also recommend a portfolio of no more than approx 8-10 stocks in a portfolio.

Respectfully asking, what are your thoughts on this? Would you ever consider holding only to 10 stocks?

Regards,
H.

******** to which I replied: *******

Hi H.,

Buffett has now:

- 37 stocks
- 60 or more private businesses.
- Derivatives
- Bonds
- lots of cash
- warrants

That is quite diversified.

Note that Buffett uses lots of leverage and has done it for decades. Mainly investing the float from his insurance companies and more recently the billions of cash obtained by selling options on stock indexes.

From what I remember Philip Fisher had 30 stocks during most of his life and reduced it to less than 10 only in his old age. His son said that he did that when he was older because he had a hard time to concentrate on more.

I try to invest a substantial part of my portfolio in the top 10 or 15 stocks though. I would prefer to have 10 stocks or better only one if I was 100% convinced about it. But that’s not how things have turned out. I have some small positions that either were bigger in the past or never evolved to be big. I do not like to have such a situation but I do not consider that now is the time to sell them.

I think that you have to have a few stocks with most of your money in them. Cash on the side for opportunities when the market falls. And have as many stocks as you are able to comfortably follow. Some people can follow 30-50 quite deep because they dedicate all their time to it. But others don’t have so much time or don’t like to have many and concentrate on less. Distribution matters more than absolute number of companies (how much do you have invested in your top holdings). The key in my opinion is not have stocks that you do not know very well.

Cheers!
jrv

PD: I never read Where are the customers’ yachts ? If you are interested I can trade it for another book (that you may chose from my book list).

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About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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