We hear a lot of wise advice throughout our investment journey from what we feel as the best investor of all time, Warren Buffett. There are many of them which I vividly remember but there is one in particular which I thought was extremely going to be useful.
I came across the Buffett’s analogy of punch card which I think is a brilliant mental framework for all investors to consider. In this analogy, he referred an investment selection as tickets which an investor has only 20 chances to make throughout his lifetime. Because of this limited selection, an investor will have to think twice or thrice before putting his money into the investment because it would force the investor to think much more than under the normal circumstances.
I think this is very much a reformed way of thinking about investing because it forces you to transform the thought process from “Is this stock a good selection to invest my money in right now” to “Is this stock the best selection I could choose to invest my money in right now”. For instance, when we think about investing in ST Eng, we think about whether the current PER of 18x is fair, whether the growth in the future is apparent, or whether the defensive downside is limited. It allowed our mind to think more about such questions because you will not be looking just for an average but great investment. After all, 20 chances is all you have to make it work or break.
This brings me to another point on whether as an investor you should have more than 10 or 15 stocks in a portfolio, or the lesser or more is better. For one thing, the general benchmark should be 30 local stocks in a portfolio because if you have more than this in your portfolio, you are probably over diversifying more than what the STI index is currently doing, which does not make absolute sense to me.
I personally have 10 local stocks currently in my portfolio but if I have to be selective, my top 4 holdings have 2/3 weightage of the overall portfolio. I personally like to revolve around this figure in the near future because beyond that point, not only you lose the point about diversification but also the focus that what you are actually holding is a business that you feel strongly about performing better in the long run. In other words, think about being a business partner for more than 10 companies and your attention will undoubtly get divided. If you are arguing about diversification, 10 should provide sufficient coverage for local stocks diversification, the rest should go beyond the different asset classes such as bonds or different geographical areas.
Some people have argued in spite of the sub-diversification they own they hsve remained focus on the selection of the wide variety of stocks they have in their portfolio. I believe them. Different people spend different amount of time on their “businesses” and the amount of effort he or she is willing to put in to understand the business. For me, I try to at least keep abreast of the daily news announcement coming out from the companies I own, industry research, quarterly results announcement, follow up with the investor relations and management about the constant business risk and future projections, attending the AGM, compare a few valuation methodology and writing my thoughts on this blog. That keeps me busy enough more than what I would have liked to.
As you get more experienced with investing, your test of skill, knowledge and emotions would have adjusted to the better of peak and trough of economic cycle. By then, maybe holding lesser shares in your portfolio with higher substantial amount would bring greater internal returns over the long run. After all, who spends that kind of effort if you are holding only a lot share of every piece of the business?
What about you? How many is an optimal figure based on your portfolio and liking?