(Before It's News)
The investment strategy I recommend to my readers, and the one I personally follow, is controversial.
It's about focusing on a small number of stocks – only your best ideas – and letting them ride.
Most “experts” tell investors to hedge their risk by owning 20 or more stocks. But the effects of a small-portfolio approach can be mind-boggling.
Let me walk you through one example…
This example comes from Murray Stahl, CEO of investment firm Horizon Kinetics. I bring it to your attention because when I read it in 1997, it “wowed” me so much that I've never forgotten it.
Maybe it will have the same effect on you.
Imagine the year is 1982, and you have a portfolio with equal dollar amounts in the following six stocks:
||General Public Utilities
||Pan American World Airways
How do you think you would do if we fast-forwarded about 10 years later – to the end of 1993?
Before you answer, let me give you a clue: Both Pan American and White Motor went to zero.
Put another way, one-third of your portfolio would become worthless – a loss of 100%.
And here's another clue: The S&P 500 would return 17% annually from 1982 to 1993.
Given those two clues, do you think that six-stock portfolio beat the S&P 500?
The surprising answer is… yes.
That six-stock portfolio would return about 19% annualized. And the source of those returns comes almost entirely from just two stocks: Chrysler (which returned 32% annualized) and General Public Utilities (28%).
These two stocks would come to represent 93% of the portfolio.
Stahl writes: “The power of compounding is so remarkable that these two more than compensate for disastrous selections.”
It's an extreme example. And maybe it's impractical to expect anybody to stick with a six-stock portfolio untouched for 10 years. Then again, maybe that's why many investors do so poorly in the market.
In any case, the example shows you what just a couple of big winners can do to a focused portfolio.
: Chris Mayer's Focus
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