Background: Serendipity the occurrence or development of events by chance in a happy or beneficial way. For me, meeting Sameer as his family lovingly calls him was no different. Its been 8 years of learning from some one who has an innate ability to question (with data) and think out of the box. It’s a pleasure for me to have him co-write this post (my contribution is just the narrative, the real deal is his data and numbers).
Let’s read about a single stock portfolio.
If you are on Twitter, you should by now be used to ism’s of every kind on how to go about building wealth in markets.
Bhave Bhagwaan Che say Investors who follow Price without really explaining how one reduces the number of stocks from hundreds to something more meaningful and easy to execute.
Buy Stocks for the Long Term say Classical Fundamental Investors without mentioning how to find stocks that will still be around 10 years from now let alone have generated wealth.
Financial Planners on the other hand say, don’t worry about Portfolio or Returns but about whether you can reach the goal.
Everyone loves to talk about stocks and why not. Stocks are more volatile, Stocks can be storified and Stocks finally are about their underlying Business and it’s easy to make a case for or against a stock. Add to it, it makes for good party talk.
So, what is a good portfolio?
A good portfolio is something that contains just the right amount of stocks and yet is diversified enough to provide protection from the vagaries of nature.
Charlie Munger whose quotes you will find tough not to come across for example has a portfolio that consists of just 3 stocks. Thes stocks he holds, Berkshire Hathaway, Costco and Wells Fargo. A caveat though – Gurufocus shows his portfolio as 3 but omits Berkshire and instead has Bank of America.
When you look at the number you may tend to feel that this is an overly concentrated portfolio but if you dig deeper you know that though Berkshire Hathaway is a single stock, it’s actually made up of more business and variety than what many indices can provide.
When we invest in real estate, we don’t diversify. We make a commitment that is most of the time larger than our Networth in a single investment. Never do we worry what if I have picked up the wrong location and one that will go down in value.
While it’s true you cannot really compare a house with a stock, even in the world of investing there are options where you can safely invest 100% of your net worth and be diversified enough even though you hold a single ticker symbol. The Vanguard Total Stock Market Index Fund for instance.
From Mutual Fund advisers to Asset Management Owners, I am yet to come across someone who will suggest that a portfolio can be diversified by holding just one fund. On the other hand, I have come across Advisors who suggest their clients to buy 2 of everything – Large Cap, Mid Cap, Small Cap, Multi Cap and for good measure a couple of thematic / balanced funds.
In a way, this is a hedge for Career Risk. In 2017, Client is happy seeing the returns of the Small Cap fund while in 2019, the large cap funds would have given him solace and in March of 2020, the Balanced Funds would have proven their worth.
Client is Happy, Distributor is Happy and of course the AMC is happy.
What more can you ask for?
But, when it comes to stock, how many stocks should you hold? Well, it depends – if you are betting on say Nano Cap Stocks, the more the better for the odds of success is low but it provides the optionality when a few stocks hit the jackpot. But if you are betting on large cap stocks, do more stocks add value or just another number
Vijay Mallik has a post (2015) where he says that you need nothing more than 30 stocks to be well diversified