How Many Stocks Should You Own?

[CityFarmer]

sgx shld follow hkex - just interim and year end reporting..to me is a waste of time and paper and compliance costs for both shareholders and company to report quarterly..

David Webb wants quarterly reporting for HK.
6 months too long. Meaning directors and substantial
shareholders has even more info advantage than minorities
Can buy or sell ahead. Or privatised. Not a good thing.

I prefer quarterly reports. We need to know the on-going status of the business, to make timely decision as an investor.

[rogerwilco]

Personally I think how many stocks we should own are determined by:

1. Our investing style.
Some value investors are more quantitative (use screeners, PE, PB, EV/EBIT, P/FCF, etc for example: Walter Schloss, Ben Graham) than others (Phillip Fisher, Seth Klarman, early Warren Buffett). Quantitative value investors tend to hold larger number of stocks than the qualitative one because the qualitative one prefer to do more 'scuttlebutt'. It's hard to do scuttlebutt when we hold 100 stocks.

2. Our conviction
Despite of the amount of research (scuttlebutt), sometimes it's still hard to concentrate our investment in a few number of stocks. For example in biotech industry, one letter from FDA can change a former blazing hot biotech company into a freezing cold one. However the biotech industry holds promise of multibagger return to some investors. What to do if we want to invest? diversify to a larger number of stocks.

In general, I keep up to 20 counters in the bag, but they are not equally weighted. E.g. last year, 5 counters form around 70-80% of my portfolio. At the moment, 2 counters form 80% of my portfolio.

Yep, not only we must determine how many stocks we should own, we should also determine how much we should allocate to individual company... another interesting topic to discuss

[HitandRun]

I think not until you have been hit or wiped out by a specific company, will you agree that OPMI have not much choice but not to put all your eggs in one basket. i am not afraid of market risk but very very frighten of specific company risk. No doubt it may be Lehman brothers or BAC or SPH. Who can be sure? If i can be sure, i might as well put all my money in SPH or DBS or UOB or OCBC. it makes my life so much easier. No?

At one time i think BAC was a very good buy at $30 to $35 US. i wanted to buy more. My wife said no. In fact we took some profit at US $40 - $40+. Now it's only $14+ and is going nowhere. We are losing money for the balance units. Just imagine if i put almost my eggs in this basket.
And go and google about Stanley Ho's father.

Uncle Temperament

Thanks for a reminder on my infallibility or rather, the lack of it.

The other part of my strength (I think) is that I can cut my losses very quickly too.

[Temperament]

I may own 1000 stocks but if another value stock just crawls by, I will still take the bait.
Therefore, there is no limit to how many stocks I will like to own.
And, I can kick any stock out anytime. Especially, a supervalue one pops up and I am running out of cash, I will clear some stocks from my portfolio to buy it.

A value stock is a value stock. What has it got to do with no. of stocks in your portfolio? In mathematical term, both events are almost orthogonal.

Theoretically it will work, but in practice, resources needed to filter the stock(s) to kick out from your portfolio. The work involved to filter 10 stocks, is vastly different from filtering 100 stocks, let alone filtering 1000 stocks.

Although there are more than 700 stocks in SGX, the worthy ones are likely to be less than 100 or even less after preliminary filtering.
For these 100 stocks, many of them do not generate events that required repeat analysis or daily/weekly monitoring.

Eg. if SPH is one of the 100, there is really nothing much an investor can spend his time on except waiting for quarterly reports. Once in a blue moon, SPH will spin out a special event( spin off a REIT) and the investor will do some calculations, make some decisions and after that, everything will go back into steady state again.

In my case, sometimes, I even missed the quarterly report of some of the counters I held. Not a big deal in most cases.

Well, it depends on individual analysis method. A portfolio with 50-100 stocks for Walter Schloss alone, is manageable, but similar portfolio with Peter Lynch, will be definitely over-stretched.

Even for SPH, focuses on financial reports alone might not be sufficient, to fully understand its biz status, IMO.

100% sure it's not so easy. if not a lot of mathematicians, accountants, etc... will abandon their professions and become millionaire investors overnight. Even some Ah Bengs with some maths may be able to do it then.

Even for SPH, focuses on financial reports alone might not be sufficient, to fully understand its biz status, IMO.

[fat al]

i am not afraid of market risk but very very frighten of specific company risk. No doubt it may be Lehman brothers or BAC or SPH. Who can be sure? If i can be sure, i might as well put all my money in SPH or DBS or UOB or OCBC. it makes my life so much easier. No?

To add to above on company specific risk, fraud is the biggest wildcard.
Some savvy investors may smell out Enron and Lehman before their collapse. However, for Barings, probably only one guy was aware of the real situation before the collapse.

[Temperament]

i am not afraid of market risk but very very frighten of specific company risk. No doubt it may be Lehman brothers or BAC or SPH. Who can be sure? If i can be sure, i might as well put all my money in SPH or DBS or UOB or OCBC. it makes my life so much easier. No?

To add to above on company specific risk, fraud is the biggest wildcard.
Some savvy investors may smell out Enron and Lehman before their collapse. However, for Barings, probably only one guy was aware of the real situation before the collapse.

Yes! The reason i am very very frighten is because "Truth is stranger than Fiction". You may think something is impossible to happen and yet it happens. Or you can never fathom or imagine it in the 1st place.

Another words, once you put your money down in a company, anything can happen to your money. No matter what you think or believe.
"BU PAH YI WAN. ZI PAH WAN YI"

[erickong]

I will start by asking myself about how many offspring one would like to have?

If there is no other constraints, the parents would like to have as many as possible. But the biggest constraint is the energy and effort devoted to take care the young until they can survive themselves.

In many cases, the more intelligent the species, the less offspring it has. Additionally, more intelligent species generally require significantly longer time to develop: for instance compare a human which takes about 13 years to reach maturity to a dog which will take around a year. With that in mind it makes complete sense. If a human mother has 12 babies at once, think of the burden that would have on the mother having to raise 12 offspring in a 13 year period. In contrast, a dog is much more capable of raising the same 12 offspring in only a year, it doesn't need to devote nearly as much time.

Fish have thousands of offspring because the fish never even have to take care of the offspring. Once born, the fish need to fend for themselves.

Now, come back to value investing. With only a few years experience, I consider myself a less intelligent investor, and I diversify into around 40 stocks. For a small portfolio, that would not be possible without the "no minimum commission broker". As a learner, I think, the following are the benefits of a diversified statistical value-investing approach:

1 less volatility on portfolio value, hence less emotional on a particular stock.

2 more liquidity. Illiquid micro-chips tend to pop up for normal valuation screening. normal fund manager will avoid it due to liquidity reason. Individual investors having diversified illiquid micro-chips do not have much concern.

3 consistent (less volatility) return. Undervalued stocks by definition are unfavorable, at least in the short term, no one knows when the price will comes to the norm. By having a large number of stocks, one is more patient waiting for that to happen, and from time to time 1 or a few tickers in portfolio approaching its intrinsic value every month, its more likely to have a consistent return of 1-1.5% per month than having only a few value stocks.

4 Reducing the risk of individual fraud or mismanagement.

5 one learns faster (more in shorter time). One normally understands more of the company when he buys its stock. Having a large number of stocks, one is exposing to various of special situation of a company, he will force to learn from the relationship between a event and the price action of a stock. By tracking dozens of stocks, he also have a better feeling about the whole market.

Of course, to have the benefits, the learner needs to put in a lot of effort. The learner may have as many stocks as possible (as long as he feels comfortable). Research found that lower income, poorer, younger, and less well-educated investors invest a greater proportion in individual stocks, hold more highly concentrated portfolios, trade more and have worse performance.

Having that said, for the really intelligent, patient and well informed investors who can pick long term growth stocks, and can really understand the company and the management inside out, they may not care about "short term" volatility or illiquility or performance If they only care about "long term" absolute return, a concentrated portfolio suits them well.

zf87,

Pretty good write up from the "highly diversified" side!

Another benefit is one can go across countries, and not limited to Singapore, and take advantage of price inefficiencies in other countries by using a statistical quantitative approach. The focused investors can only look at Singapore (home ground) and loses the advantage of picking the low hanging fruits in other countries! Unknown to a lot of people, it is not difficult to achieve long term returns of 20% p.a. using this approach - but without the risks of concentration.

[opmi]

Other countries also have their own focused investors, right?

[Temperament]

Other countries also have their own focused investors, right?

One of the main consideration that holds me back from investing oversea is our Singapore $ tends to appreciate viz a viz other countries $. Besides there are usually additional fees and administration matters.

[Ben]

Another benefit is one can go across countries, and not limited to Singapore, and take advantage of price inefficiencies in other countries by using a statistical quantitative approach. The focused investors can only look at Singapore (home ground) and loses the advantage of picking the low hanging fruits in other countries! Unknown to a lot of people, it is not difficult to achieve long term returns of 20% p.a. using this approach - but without the risks of concentration.

So far I have not venture out of Spore shore. I personally think that if I can not make it in home ground, what chance have I got if I go overseas where everything is unfamiliar? Maybe I am KS, but I prefer to maintain my firepower in the place I am most familiar with. I do however have stocks that operate globally. This way, I have exposure to overseas opportunity without leaving shore.