Keep Your Portfolio Simple, Just Like Your Life
“His portfolio looked like Noah’s Ark: It had a little bit of everything.”
“Bob” was a family friend.
He ran his own business and was very successful.
Besides his real estate holdings, he also “dabbled a bit in the stock market.”
“Hey, Charles, would you mind taking a look at my portfolio? I’d greatly appreciate any advice you could give me,” he asked one day.
When I ran my money management shop, I got this request all the time — and I hated it.
Friends, family members, and acquaintances would all come to my office and bring along their latest brokerage statements.
They came for one of two reasons: to hear me tell them how smart they were or to ask me to help them.
Either way, it was a pain in the butt because it was always a lose-lose situation for me.
If they wanted to hear how smart they were, their stock holdings would tell me otherwise.
And if they wanted help, I’d give them advice that they didn’t want to hear.
Don’t get me wrong, Bob was a really sweet guy. I couldn’t tell him no.
“Sure thing, Bob. Stop by my office anytime,” I replied...
It’s a Thankless Job
A few days later, my secretary buzzed me on the intercom: Bob was at the front desk.
After some small talk, he took out a three-ring binder from his briefcase. It was huge.
“Here you go, Charles,” he said, pushing it toward me.
The loose-leaf paper was well organized. He had each month’s statements separated by a divider. I started to thumb through it.
Bob wasn’t kidding when he'd said he “dabbled” in stocks. Each month, he bought a few new stocks to add to the already long list of stocks that he already owned.
I flipped through to the most recent month and started counting. Bob had 136 different stocks!
“Bob, how the heck do you have time to research all these companies?” I asked.
“Who has time to research them? I speak with my stockbroker a few times a month. He then tells me what stocks are hot, and I tell him to buy me 100 shares.”
I couldn’t help but smile. “Bob, why did you want me to look over your portfolio?”
“I don’t think my broker is doing me good,” he sheepishly answered.
Bob was a stockbroker’s wet dream.
Anytime this guy called Bob, Bob couldn’t say no. Each time Bob bought a stock, the broker made a commission. Keep in mind that this was back in the day when discount brokers were not so common and broker commissions were hefty.
I’m sure that anytime Bob’s broker needed to go on vacation or pay his mortgage, he'd call him with another “hot stock” and bank another commission...
It’s Called the “Churn and Burn”
I told Bob what he already knew: fire his broker.
He said it was hard. He golfed with the guy every Wednesday and had known him for 20 years.
Bob’s broker hadn't been doing him any favors. He did have some stocks that were up 200%, but those stocks represented about 0.50% of this portfolio. So, they didn’t move the needle on his overall performance.
Those gains were nothing more than a pimple on the ass of an elephant.
There was also no rhyme or reason to why he owned some of the stocks that he did.
He had blue chips, penny stocks, and everything in between.
We ordered lunch and ate at my desk.
I told Bob that I would narrow the portfolio down to 30 stocks. Everything else, he'd have to sell.
He promised me that he would.
I wanted him to hold no more and no less than 30 stocks at any time. I also told him to put an equal amount into each stock.
This way, his portfolio would be diversified but not too diversified. There wouldn’t be any single stock that could cause his portfolio to go to zero.
The problem that Bob had is all too common. He had a portfolio that looked like Noah’s Ark: It had a little bit of everything.
It’s a rookie mistake. Who the heck would want to invest in their 103rd best idea? Apparently, many investors do...
There are only so many good ideas to invest in. So, doesn’t it make sense to put your money into your best ideas?
Investors like Bob have no shot at making money over the long term.1
When they tally up their returns, they're usually flat.
The winners and losers cancel each other out...
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You Can’t Kiss All the Women, and You Shouldn’t Even if You Could
I’ve followed some great investors in my career. And I've learned as much as I could by following what they've done.
Some of them had very concentrated portfolios. They would never own more than 10 stocks at a time. And a few of them would never own more than five.
This was too concentrated for me. I knew I wouldn't be able to sleep well at night with 10% to 20% of my net worth in one stock.
At one time, Warren Buffett had about 40% of his holdings in one stock: American Express.2
But I wasn’t Warren Buffett, and I wasn't fooling myself that I could invest like he did.
I saw other great investors hold diversified portfolios with usually no more than 30 stocks.
They would invest an equal amount into each one. No one stock could wipe them out, and the gains would still be meaningful to their accounts...
30 for 30!
That made more sense to me. But at the same time, I wanted to concentrate my portfolio on just a few stocks that I was very confident about while knowing my limitations.
So, instead of choosing one over the other, I chose both.
I set up my portfolio with what I call “ring the register” stocks.
It's a portfolio of 30 stocks that I bought when they were selling at cheap prices.
My goal was to make a 50% return before selling them.
I would then replace the stock with another cheaper stock. Each time I sold a stock from the portfolio with a 50% profit, I'd ring the register.
And if a stock didn’t go up by 50% after holding it for a certain period of time, I'd simply sell it.
My other portfolio is a “sit on your ass” portfolio. I borrowed this approach from Charlie Munger, Buffett’s business partner.
This portfolio involves buying a few stocks of great businesses and then sitting on your ass.
That’s it. As the businesses grow, so will your portfolio.
I use both of these approaches in my other service, Insider Alert.
And I reserve my fast-moving stocks for my exclusive Insider Alert service.
Insider Alert is part trading platform, part situational investing based on my access to Wall Street circles.
Some of my recommendations come from “whispers” that I receive, and others come from patterns that I've observed over and over again in stocks.
And that’s why I want to tell you about a little-known trading pattern in the stock market that’s been working like a charm for me.
I call it “13W.”
It stands for “every 13 weeks.”
Every 13 weeks, I see a trading pattern play out over and over again. Sometimes, the moves are huge — sometimes, not so huge. But they're big enough to make it worth my while.
So, if you have a few moments, I’d like to explain how it works for me. All my best, Charles Mizrahi Twitter: @IWPeditor Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street. And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the founder of Park Avenue Investment Club and the Insider Alert newsletters. Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
Founder, Park Avenue Digest
All my best,
Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.
And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the founder of Park Avenue Investment Club and the Insider Alert newsletters.
Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
1 Hear Charlie Munger’s advice for the DIY investor. He doesn’t hold much back.
2 A fascinating story about how Warren Buffett made 10-times his money from putting his money into American Express during a scandal.