How do I pick the number of positions in my portfolio.
“There are just a few things I might change now. I said that 25 to 28 stocks were the most you should try to keep track of, but I have cut that down now for myself to 10 to 17 or so. I currently have 12…”
Saul, over your investing career, which has been more traditional for you? Did you tend to be more concentrated and were experimenting with more positions over the last couple of years, or is more concentration a newer approach for you? Thanks!
Neil
Neil, that’s a heck of a good question and I had to think hard to answer it. Here are some answers: I think the number of stocks in my portfolio waxes and wanes according to a number of things that I will discuss below, but probably never EVER less than 10 or more than, say, 25 to 28. Okay, so what makes the difference?
A. If I have a number of stocks that I have strong convictions about I will tend to add additional funds to them instead of looking for new stocks, and I end up with a more concentrated portfolio.
B. When I have less conviction I will try out a lot of smaller positions in order to decide which ones to add to and make ongoing positions, and which ones were mistakes, and I can therefore eliminate.
C. Consider, for instance, if something were to happen and I were to have to exit my largest position (SWKS) now. That would be a big part of my total portfolio. I wouldn’t put that much into any one or two new stocks, nor would I add that much to existing positions. I’d probably have to reallocate the money to five or six smaller (3% to 4%) positions, and maybe one or two “put it on the radar” (1% to 2%) positions.
D. When the market tanks irrationally, I tend to reduce or eliminate the stalwart stable stocks that haven’t declined much, the WAB’s for instance, and reinvest the money in the great, fast growing stocks, which have declined a bunch with little or no reason except that the market is falling. This also tends to concentrate my portfolio. I might buy some of a new stock that has fallen in one of these panics, but it’s difficult emotionally to put money in an unfamiliar stock when there’s panic all around.
E. When I think my main stocks have gone up irrationally and are over extended, I tend to trim them and put the money in new “try-out” stocks. This increases my number of stocks. (This is similar to B).
F. Right now, I’m very content (which can always be an error). My three largest positions have an average PE under 25 and they are growing earnings at 83% per year. I only have three positions with PE’s over 30.5 and they have rates of growth of earnings that average over 100%. I have NONE with PE’s over 46! While this is a scenario A, it’s also, paradoxically, a little like scenario D above. I say this because, although the market hasn’t declined, my major stocks seem quite undervalued in relation to their growth, perhaps because they have advanced rapidly and are victims of price anchoring, perhaps, as with SWKS, because they have risen 100% in the past year, perhaps, as with SKX, because no one was taking them seriously, perhaps, like INBK, because they are small and considered unproven, perhaps, like BOFI, just because they are a bank. At any rate, as with scenario D, I have tended to add more to these already large positions, to the detriment of slower growing positions like POL and FB, which I eliminated, and WAB and CELG, which I have reduced somewhat.
I really like it better when I have fewer, but high conviction stocks. I’m more comfortable, and I can probably make more percentage gain for my portfolio with 12 positions than with 24. Fewer are easier to follow, and the chances of finding 12 that will average 30% gain (if you can find them), is MUCH better than the chances of finding 24 that will average 30% gain, and HUGELY better than your chances of finding 100 that will average 30% gain.
I hope that this helps.
Saul
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