How many stocks is the right number of stocks?
I’ve been pondering this question recently, for a couple reasons.
Reason number one: Every weekend, Cabot Wealth Advisory Editor Paul Goodwin sends out a “Fortune Cookie,” in which he picks an investing-related quotation to comment on. Here’s this weekend’s quote:
Paul asked Cabot’s Chief Investment Analyst, Mike Cintolo, for his two cents on this quote. Mike wrote:
“Well, Twain couldn’t have written it better if he’d been a growth stock investor himself. I wouldn’t go so far as to say ‘fools’ are the only ones who spread out their purchases, but the question is really whether you want to be average (which you can do by owning index funds and a couple dozen names), or whether you want to strive for awesome performance… which normally comes via owning a few top-notch, revolutionary leaders, and knowing them inside out.”
Paul then added: “There’s a real sense of power to be gained from actually managing your own investments, but nobody ever said it would be easy. The easy choice is to let someone else do it. ‘Watching that basket’ requires time and attention. Fortunately, the potential rewards, both monetary and personal, are substantial.”
That brings me to reason number two. Last week, a subscriber wrote to me and told me that, while she loves managing her investments and thinks it keeps her brain sharp, she’s trying to spend less time on it. She wrote:
“Now in my mid-80’s, my problem is how to spend less time on all this as I realize there are more important things in life than spending so much time keeping up on investments. I could go more into mutual funds than individual stocks but that seems so boring.”
As Paul said, managing your own investments is work, especially if you want to do better than average.
One suggestion I sent the subscriber was to manage a more concentrated portfolio. While some might say concentration increases risk, especially for an 80-year-old retiree, it does make it a lot easier to “watch your basket.”
I keep my own portfolio very concentrated, so that I can keep an eye on each individual stock. I like to check each chart every day. If anyone asked, I could rattle off the name of every stock I own right now. (Of course, it helps that my portfolio is small. It would probably be a bit more nerve wracking having tens of thousands of dollars in one stock.)
In addition to making it easier and less time-consuming to keep track of your stocks, having a more concentrated portfolio can make it much easier to do better than average. One big winner won’t affect your results very much if it only makes up 3% of your portfolio. But a larger position in that same investment could mean a very big payday.
As Mike argues very well above, the more you spread out your money, the closer you inevitably get to being average. Take the assumption to its extreme: if you owned every stock in the market, you’d be exactly matching the performance of the market.
Warren Buffett has said pretty much the same thing about his own portfolio (which is Berkshire Hathaway). Way back in 1995, he said, “The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas.” He reiterated the sentiment at this May’s shareholder meeting, noting that size had become one of Berkshire Hathaway’s big disadvantages.
But even if you’re not managing a portfolio the size of Berkshire Hathaway, there’s a size at which your positions are just too small to make a difference.
This all boils down to a question for you: how many stocks do you own?
I’d like you to tell me, if you don’t mind, by replying to this email.
And, if you have time, also let me know how you settled on that number. Is it influenced most by your time and attention, your investing system, or the size of your portfolio? (If it seems relevant, you can tell me the size of your portfolio too, and I’ll keep your information anonymous.) And, make sure to let me know how you feel about the number of stocks you own: do you wish you had more, or do you think you already have too many names to keep track of easily?
Let me know by replying to this email, and I’ll update you on the results next week. I’m interested to see how real investors distribute their eggs among baskets, and if you feel your level of concentration or diversification is working for you.
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Lastly, I thought you might be interested to hear some of the responses I got to last week’s column on health insurance. I complained about the mysterious bills I get for routine medical exams. Overall, you agreed with me, especially with my point that using insurance to pay ordinary, expected costs hurts the consumer and benefits no one but the insurance company. Here are a few of the letters that focused on that distinction:
From Dudley C.:
“Your very clear thinking about the use of insurance for normal, expected costs of medical care makes me respect you very much. While I don’t like the overall aspects of Obama care, I have long wished for a fix for the problems of our medical care system. In general, I also think a national insurance system should only cover the extraordinary care, not the normal. One of the problems that has always irritated me the most is to see what the negotiated price is (typically only 10 to 20 percent of the charge) and to think that those not covered by insurance get stuck with the whole price. I know I should only be glad I don’t have to pay the huge costs but I have a brother who doesn’t get the coverage and he usually just doesn’t get the medical care! I vote to put you in charge of fixing the situation. Thanks.”
From one of our Dick Davis Digest Contributors who also reads Investment of the Week:
“I agree with you. In my case I went to the doctor for an issue and he said well maybe we should check your whatever and make sure that isn’t the issue. So I said okay, and the bill ended up testing a whole battery of presumably related things and was $800!! and I had a to pay a chunk of that, don’t recall now this was a while ago, but had I known that I think I would have passed.
“I think doctors should be able to look up how much the lab or hospital or doctor’s office itself is going to charge and then of course they may not know what your insurance company has negotiated with them, but with all the data around nowadays, the basic, original (pre-negotiated) charge for these tests, at least must be known … and why not what the insurance company will pay of that as well?
“I think if you are willing to request the info from the insurance company and wait to do the test after and got through all that you could find out first and then decide if you want the test, but that could take a couple of weeks. And pain in the butt for something that ought to be available in this age of the cloud and all. It is a giant mystery how the insurance company takes the basic charge and then comes up with what they’ll pay and then whether the healthcare provider will eat the rest of that or you have to.”
From Eric L. from Thousand Oaks, CA:
“I agree that routine health expenses should be handled like all our other regular expenses. Insurance should be for those (hopefully) unforeseen emergency situations. Throughout my career, I’ve been fortunate that all of my employers have provided decent health insurance plans and whenever I’ve had the option of a high deductible plan, I’ve always chosen that one. When one hasn’t been offered I have lobbied hard to add one, but sadly to no avail. The answer usually is that there isn’t enough interest, which blows me away.
“For routine services like physical exams and blood work, I and my family use an outfit in town called the Wellness Mart. It’s operated by a reputable MD who got fed up with the current insurance environment. When you walk in, the price for every single service they offer is posted on the wall—understandably, it’s a very long wall! You know what it costs up front and prices are reasonable. The service is quick and excellent and usually we can get an appointment the same day. Maybe I could save a little money if I used my insurance plan for these things, but the hassle isn’t worth it and I am happy to support a guy who I think is doing the right thing. Hopefully his concept gains traction and grows.”
From M. Meyers:
“I share your frustration about not knowing how much a doctor visit or test will cost. I like to get quality products at a really good price, and am pretty successful when shopping in areas outside of health care. Sometimes I think that just calling a doctor and saying I don’t have insurance and what is the cost is the only way to get a straight answer. If the doctor’s office knows I’ll be the one paying, they generally will find out the numbers. That’s the technique I use with the dentist, and it works. Otherwise, I call my insurance company prior to an office visit and find out what precisely they will or will not cover.
“Of course, when I’m sick and have to go to the doctor, I don’t have the mental acuity or time to phone in advance. When we most need to be negotiating, we are least able, and I hate that! In the meantime, I’m asking the doctor’s office about their specific office visit charges in advance, and confirming whether the doctor will accept the insurance payment as full payment or not. I’m calling my insurance company about test coverage in advance of approving tests recommended by the doctor. I can always go back just to have blood drawn after an exam, if I want to go forward with the testing. I think that if more people speak up and ask direct and detailed questions in advance, the doctors’ offices and insurance companies will be pushed into a corner called having to give a detailed answer. Then, I can decide how to proceed.”
And lastly, here’s part of a letter from David L. Smith, MD, who also mentioned a few other problems with the system (including the need for tort reform). Here’s what he wrote about how he and his patients see health insurance differently:
“The problem is that nobody bothers to make a crucial distinction. There is health insurance, akin to your car insurance, which indemnifies you against loss. There is health care coverage, which is what everybody wants instead of mere insurance.
“I’m a family physician, and cannot tell you the number of times I’ve heard, ‘But my insurance is supposed to pay…’ Patients EXPECT first-dollar, every-dollar coverage and resent even paying a deductible. (Secondary rant: and with absolutely no deductibles for Medicaid, there are absolutely no barriers to health-care over-utilization, either office or emergency room.)
“I think we should have universal health INSURANCE, with choice of levels of deductible. When it was available to me, I had a $10,000 deductible. That policy indemnified my family against major health expenditures and cost only a few hundred dollars a YEAR (25 yrs ago). I think that should still be on the menu, in addition to the potpourri of expensive-care options.”
I want to thank everyone who took the time to reply (I didn’t print all the responses here).
I’m impressed with the out-of-the-box thinking many of you clearly demonstrate on this issue. Next time I go to the doctor for something routine, I think I will try M. Meyers’ technique of asking how much things will cost ahead of time. In addition, I’m glad to know about the rise of medical centers with transparent prices … sounds like they could be a powerful force combined with those high-deductible plans that are actually focused on insurance. And I’m glad to have heard from a couple of physicians who are also aware of this issue.
Finally, a reminder to respond to my informal survey on how many stocks you own. Thanks!
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Investment of the Week
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