Would you suggest buying as many stocks as possible that I can or limiting it to a few that I can follow better. In other words, is it better to own 200 or 300 shares of 12 or 15 stocks or 1000 shares of 5 or 6 stocks? (April 21, 2003)
Great question. Position control is a very important and overlooked factor in investing. You turn on most financial stations and the mutual fund managers will tell you that you have to diversify in mutual funds or if you do your own investing you need to be a 'mini' mutual fund, i.e., won lots of different stocks in relative equal weighting. The idea is plausible in that you do not want to be wiped out by any particular stock tanking on you in a big gap lower. You can handle the slower pullbacks, but the big breakdown is a problem that every investor has to deal with at some point. Diversification is one route to help mitigate the effects.
The problem is, you diversify yourself into very mediocre performance if you hold a mixture of stocks where some do well in recessions and others do well in economic booms, etc. They tend to offset each other no matter what the market does. What we do involves more risk in a way, but also less risk in a way. We like to focus on stocks that are showing good accumulation and continue to 'act right,' that is those that breakout and move up with good price/volume action, rallying off the short term MVA on strong volume and then pulling back on lower volume. That shows there is continued accumulation. We focus in on the winners when they get to good buy points (pullbacks to support early in the move), buying in when they provide the next good entry point using money from other stocks that started to show weakening action that we sell out of. That way we put most of our money into winners while moving out of the slower performers or those that are starting to break down.
When there are many stocks make breakouts, you get into the position of wanting to own them all. Been there. It is much too difficult to try and monitor 50 stocks, 40, 30, even 20 or 15. We do it because we have the manpower to do it and also have had programs written to help out. The individual can still get too streteched out, get too hurried, and start to make mistakes by missing signals. When I was first getting started I wanted a piece of every stock that made a good move. I was all over the place until I learned to pick the stock patterns and play types I preferred the most, focused on those, and when there was a clear leader or clear leaders of the group I would start putting more money into those as they provided entry points. I would sell the others either when they failed to perform, ran out of steam and started to waffle, or just could not keep up with the other winners in terms of gains. I was most efficient with 5 to 6 option or short term positions, but could have 20 longer term positions in retirement accounts or longer term stock accounts. 20 was the maximum and was really too many. As I was holding stocks such as MSFT, DELL, and CSCO for the long term and riding strong uptrends, however, it was easier. Today the same principle applies but the names have changed to UNTD, SOHU, MSTR, NFLX, EBAY (same stock but different cycle), etc. Plus I have help to manage more positions.
The key is to keep it manageable as you focus on winners. In this market a winner can turn sour on you rather quickly so we are more inclined to take a gain if things get rocky than during an established bull market. You have to be focused enough to see what the stock is telling you as you keep an ever present eye on the market overall. Even in this market, hwoever, we will let them run as long as they do run for us, using the same culling and concentrating process.
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