To simplify, the Gardners’ point of view is that if you buy the same amount of 19 stocks and 18 do poorly, and even go to zero, the one that is a 20-bagger will make up for the losses. Therefore you should never sell your losers. That works in theory, and on paper, but in the real world, if it’s a portfolio with your money in it, it doesn’t work at all.
That’s a pretty radical thing to say, so I’ll make clear why it is so.
First of all, if you don’t sell any of the successful stock on its way to becoming a 20-bagger, it soon becomes 70% or 80% of your entire portfolio, as the losers shrink. Now you have a portfolio with 19 stocks but one is 70% of the entire portfolio. Given that even a stock on its way to a 20-bagger will have ups and downs of 30% or more (which would be scary as hell), and you don’t know this stock is fated to become a 20-bagger anyway (we just know that looking back later), you are not going to sleep nights with one stock at 70% or more of your portfolio and bouncing up and down. Not with your real money in the portfolio. You will probably sell some of it at varying points all the way up, keeping the percentage at a maximum of 20%-25% of your portfolio, or maybe less. And the rising stock will thus never balance all the losers.
Add this to the fact that the ones that go down keep sopping up more and more percent of the total investment as you “double down”, “reduce your average cost”, “buy at better value points”, and generally put in more and more money in at lower and lower prices. For example, on the WPRT board, when the price dropped from $32 to $25 lots of people felt it was a bargain, and bought more, and at $20 “doubled down”, and “doubled down” a second time at $15, etc. It’s hard for people to see a stock they believe in go down to what they think are ridiculous levels without buying more (it’s at $4.15 as I write), especially when it’s misleadingly still labeled a “Buy”. They’ve got this winner that is already up to five times what they paid for it, and another “Buy” that is down to 60% what they originally paid for it. Of course they will sell some of the winner that is making them nervous to buy more of the “bargain” stock.
Unfortunately, if you had 18 stocks that went to zero and one that was a 20-bagger, you probably would have ended up putting much more into each of the ones going down than into the one that went up AND you would have sold a lot of the one going up on the way. It’s natural. I’ve done it myself but try hard not to do it any more. Which is why the Gardners’ hypothesis doesn’t work in real life. It’s the difference between a series of recommendations and a real-life, real-money portfolio. JMO