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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (14212)	4/1/2002 7:46:04 PM
From: Paul Senior	Respond to of 78740

Mucho Maas, thanks for your comments and the link about problems with concentrated portfolios. Given that I generally have over 100 positions at any time, naturally I'm going to be posting very much in favor of diversification vs. concentration. For too many years theorists have just said a small number of stocks - say 15 to 30 - provides as good a risk reduction (standard deviation measure of risk) as a portfolio with more than that number of different stocks. And there they've stopped. But to make money, if one is a long term investor (which I define for this post as somebody who will be buying, holding, and selling shares of stock for decades - as opposed for example, to the lucky few who worked at Dell, and by happenstance or skill kept only Dell stock), one can, imo, increase one's chances of success by holding a diversified portfolio of stocks: Small cap/large cap, tech/non-tech, manufacturing/financial, domestic/foreign, growth/value, high div payers & growers/non-dividend paying. And of course by time diversification. Say 12 to 25 stocks bought each year being sold not just in that first year, but some being sold in the 2nd/3rd/4th/5th, etc years. (ala planting a garden and reaping the harvest in the appropriate season). The link points out that success in the backtest came from holding a few superstocks like Dell which increased 550 times. The likelihood of having one of those stocks in a portfolio was 1 in 6. Yes, if a person had (and kept!) Dell in a portfolio of 15 stocks, the person might become "fabuously rich". My idea though is that in a portfolio of 60 stocks, 10 might become superstocks. Now although that's still 1/6, there are 10 possible "superstock" companies that one could deal with - buy more shares, trade around, sell. Maybe if a stock like Dell got in there, the 552x gains would be much diluted, but still, Dell's performance is going to be very, very attractive for the portfolio's performance. And there might be 9 more very good superstocks in there as well. Compare this to the backtested S&P groups of 15 stocks, where so many underperformed because they did not even contain one "superstock". jmo. Paul Senior