One of the beautiful things about investing is that you have an unlimited number of options when it comes to the number of shares you own.
I aim to have only 10-15 stocks in my portfolio.
Why?
If that’s really the question you’re asking then you must be an astute student of diversification in the Modern Portfolio Theory.
Allow me to refer you to Warren Buffett’s take on the ideal number of stocks and diversification:
Diversification as practiced generally makes very little sense for anyone that knows what they are doing. Diversification is a protection against ignorance. You want to make sure that nothing bad happens to you relative to the market, so you own everything. There's nothing wrong with that. That's a perfectly sound approach for somebody who does not feel they know how to analyze businesses. If you know how to analyze and value businesses, it's crazy to own 50 stocks, 40 stocks, or even 30 stocks. Because there aren't that many wonderful businesses. To have found some super wonderful business and then deciding to put money into number 30 or 35 on your list of attractiveness rather than putting more money into number 1 just strikes me as madness. It's conventional practice and if all you have to achieve is average, it may preserve your job. It's a confession, in our view, that you don't really understand the businesses that you own. If you look at how fortunes were made in this country, they weren't built out of a portfolio of 50 companies. They were built by someone who identified with a wonderful business. Coca-cola is a great example. A lot of fortunes have been built from that. There aren't 50 Coca-colas. There aren't 20. If there were, it'll be fine. We can go out there and diversify like crazy among that group, and get results that would be equal to owning the one Coca-Cola we have in the world we live in. But you're not going to find it. And the truth is that you don't need it. If you have a really wonderful business, it is very well protected against the destitudes of the economy over time. We're talking about businesses that are resistant to effective competition. 3 of those will be better than 100 average businesses. They'll be safer incidentally. There is less risk in owning 3 easy-to-identify wonderful businesses than it is to own 50 well-known, big businesses It's amazing what has been taught over the years in finance classes.
And Charlie Munger’s response to Buffett:
Yea, what's he's saying is that much of what is taught in corporate finance course is dwaddle.
If you’ve spent so much effort reading this mind-blowingly long guide that’s making you somewhat annoyed, chances are that you’re spending an equal amount of effort in analyzing companies, ranking your favorites, and finding avenues to up your investing game.
I have a feeling that you’re looking to be something more than average.
So you’ll want to maximize the potential of what you know about investing.
Or you can tell me that I’ve got the wrong impression.
Your idea of investing is to own 100 companies.
Your idea of investing is to knowingly put your money in your 101th-favorite stock just to push your portfolio diversification further instead of adding more money to your 1st favorite stock.
Your idea of investing is to be within the “safety” of the market average — if your definition of safety means not being out of line from the rest of the herd.
That’s a very reasonable choice.
I’d add that you should stop reading here.
Because I don’t want to waste your time.
Look for a guide on picking ETFs and not individual stocks.
That’ll bring you closer to your goal of being in line with the market average.
On A More Practical Note.
Pardon me for acting as though I’ve already thought of Buffett’s argument on my own.
My reasoning for owning fewer stocks is far less intellectual.
It all boils down to your realistic ability in managing your investment portfolio — your business.
As we’ve discussed in the previous section, one hour per month is all I’m willing to spend in maintaining the portfolio in the long term.
Of course, I’ll be spending far more effort in the short term while I’m building it up: screening stocks, analyzing stocks, putting a fair value on stocks, and ranking stocks.
But the vision here is to put in the work (“paid work”) now and reap the fruits (future income stream that requires little additional work) later.
How many stocks will I be able to manage properly in under 1 hour per month?
You’ve got to answer this honestly.
For me, that’s 10-15.
So it’s the number of stocks I recommend aiming for.
It Still Comes Back To Value.
No matter how many or how few stocks you’re planning on holding, all of these strategies require you to identify the value of the business.
That’s just the nature of the beast and it means you have to put in the work to find that value.
Often times it requires tough introspection to dig out honest reasons why you shouldn’t buy a company rather than asking why you should.
We’ve got a weird tendency to fall in love with the first stock we see, and then consume self-affirmatory opinions to complete the prophecy.
That’s you shouldn’t buy a stock until you simply cannot find reasons not to.
It’s draining.
Some people aren’t ready for that.
They want everything to be easy and the problem with that is if everything was easy then everybody would be doing it and therefore nothing would be easy.
So the rule is that if you want to find value stocks the easy way then you need to do the hard work.
And that requires having a proper investing mindset.
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