An interesting article on Focus investing.
Although at first glance this focused investing approach may seem very risky, Joel Greenblatt tells a different story in his book You Too Can Be a Stock Market Genius noting that, “owning just two stocks eliminates 46 percent of the nonmarket risk of owning just one stock. This type of risk is supposedly reduced to 72 percent with a four stock portfolio, by 81 percent with eight stocks, 93 percent with 16 stocks, 96 percent with just 32 stocks, and 99 percent with 500 stocks.” Greenblatt seemed perplexed at why an investor would add hundreds of stocks to his portfolio to reduce risk by 3 percent.
Following David Gardner’s advice should lead to similar results in my opinion. If you let your winners run and only add to the winners, in the end you should end up with a fairly focused portfolio.
I really liked the article. I think it pays to allocate more investment dollars towards what you think are better bets. I guess this is why I don’t buy every recommendation. And I’ll also sell a stock if something I think is better comes along but usually I do that early on. Once a holding becomes a large position, I’m hesitant to sell because of the tax consequences. Maybe I need to get over that???
But also explains why Buffet avoids technology.