Yes, I'm a very strong believer in maintaining diversified portfolios. I am keeping at least 100 companies in my largest portfolio.
I often take positions in downtrodden sectors. And, as I've mentioned before, because my history has shown I don't do well in defining or determining what will be the "best" stock going forward in a sector, I often try to take positions in several stocks within the sector. My intent and hope is that at least most of the sector recovers, and that by diversifying within the beat-down sector, I have reduced the business and market risk that would've been entailed by picking just one company in it. As examples of this tactic, I have mentioned many stocks I own in retail clothing, in retail auto dealerships, in defense, in restaurants, in grocery stories, in insurance, in oil, and so on.
My point here, is that for me, it's not about which particular stock is my largest position, but which sector is. A sector drop can affects me more than a stock drop. (Although some stock drops do result large and permanent pain.)
I also like to diversify within niches. That would include having stocks which fit a dividend model which I occasionally mention, having net-net plays, and recently, several below-cash stocks. In net-net stocks, I try to follow the Graham model and buy a package of them -- when I can find any at all. (We've talked about how that differs from and seems less successful than your rifle approach to net-nets which adds a further judgmental screen.)
Possibly money is the biggest factor in diversification: one has to have enough money to diversify if one is not buying mutual funds. TIME is the second biggest element in considering diversification, imo.
I see value stocks as problem companies. Time is generally required to overcome those problems, and time is usually necessary for such progress to be recognized in the market. So I am buying value stocks now for their hoped-for progress and recovery 18-24 months out. Similarly, come 2003, I am planning and hoping to sell stocks bought 2001 or earlier. A cycle of planting, weeding, harvesting. In other words, I want to have a goodly number of stocks moving through each of these phases.
Other than the continuation of the bear market, I see no reason why owning the "best" 100-150 stocks I can find shouldn't allow me to show very good profits over a market cycle, and maybe even beat the market averages occasionally.
It seems to me posters on S.I often practice what appears to me to be some sort of combined concentration and diversification. Which is something like never owning more that a few stocks at once (say at most, 10-15), but completely turning the entire portfolio over one or more times during the year; or sometimes that's buying and selling the same stock several times or buying then selling different stocks while maintaining a "core" position of one or two or three stocks. To me, that mostly seems like trading (vs. investing) and where I don't see academic support or well-known, successful adherents.
jmo
Paul Senior |
