How Many Stocks Should You Own At One Time?
Have you ever heard of Warren Buffett’s concept of the 20-hole punch card?
“If you were given a punch card with 20 ticks on it when you graduated, and those were the only investment decisions you could make throughout your entire career, how would you use them? You would likely be very selective, and probably very rich. This type of mentality will force you to be patient.”
With this mindset you’d only invest in what Warren Buffett refers to as fat pitch investments.
“I call investing the greatest business in the world,” he says, “because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
“Wait for a fat pitch and then swing for the fences.”
These two concepts combined force you to think over the long term… Force you to be patient… And if you can follow them both will make you far richer according to Buffett.
While I don’t take the 20-slot limit literally – I’ve owned more than 20 stocks in the 15 years I’ve invested. I do stick closely to this though.
By being an extremely concentrated investor.
At one point in the portfolios I manage, there were only 2 stocks, and the portfolios were 80% cash. This happened after many buyouts, mergers, going private transactions, etc.
Because I couldn’t find anything to buy – I couldn’t find any fat pitches – I didn’t buy anything.
I can find great investments in terms of metrics, ratios, competitive advantages, etc.… But they’re too overvalued for me to buy.
So, I wait and add them to my watchlist.
At most I’ve owned 12 stocks in the portfolios I manage. And right now, I own 7 stocks – although that will soon be 6 with one liquidating.
The portfolios I manage are currently 58.1% in cash. One position makes up 26.04% of the portfolios because it continues to explode higher… As of this writing it’s now up 1,209% and I released a case study on that last week that you can see below.
This kind of extreme kind of concentration scares many investors because of its perceived lack of diversification.
But the definition of diversification taught in most universities and practiced by most people – owning 50 to 100 stocks in various industries – doesn’t make sense to me.
To me it makes more sense to know each stock you own intimately.
This way you can know their risks, opportunities, metrics, management, industry, and competitors, etc. well.
You can’t do that if you own 100 stocks in my opinion.
But you can with 6 to 12.
Why does this matter to you as an investor? And how does concentration and only swinging at fat pitch investments allow you to earn higher and safer investment returns?
Because it allows you to have a MASSIVE legal informational advantage over other investors.
As “outside” investors we can only rely on information we can find publicly about stocks through places like Google and the companies financial reports.
And because we’re outsiders we must do more and learn more and dig deeper on investments.
I put in 100+ hours of research before I consider buying any investment.
You can’t do this with 100 stocks, or you’ll drive yourself insane.
But again, you can with 6 to 12.
What does in depth research do for you? Here are a few things…
This is why I’m such a concentrated investor… And why you should consider having a more concentrated portfolio.
How powerful is concentration in terms of results?
From 2012 through 2020, the Dow Jones Index produced a total cumulative return of 68.7% for the nine years or 7.6% per year on average.
The S&P 500 produced an 80.7% total return for the nine years or 9% per year on average.
And the Russell 3000 index – the closest thing to a small cap index – produced a 77.7% total return or 8.6% per year on average.
I’ve produced returns of 23.5% every year on average over this time.
Which is more than these indexes by 15.95%, 14.55%, and 14.95% points respectively each year over these nine years.
What does that really mean?
My Returns = $67,078,717 after 10 years
Russell 3000 Returns = $21,021,050 after 10 years
Concentration would have made my investors $46+ million more than investing in the market over the last nine years assuming a start of $10 million.
If your goal is to beat the market over the long term – both Buffett’s goal and mine as well – concentration of your portfolio is how you do that.
But there’s a big warning to this…
If you know what you’re doing and know how to find, value, and evaluate stocks well. This is how you beat the market.
How do you learn how to do these things well?
