Someone asked me about the number of stocks good enough to own. That's about diversification. There isn't one good answer to it, for as low as just one stock can lead you to riches if the knowledge about the business behind it is good enough. But that will also expose you to some extreme concentration. If you owned more than say, 15 stocks, you will likely have diversification problems. If you cannot remember the names of businesses you own without referring to your books, you have some diversification issues to deal with. These are just general thoughts. There aren't right or wrong answers here though. There are more ways to make money than you and I can think of.
Graham-Newman Corporation had always owned more than some hundred securities, which were well diversified. The hedge fund managed by Ben Graham did quite well during the post-depression period comfortably beating the market. Graham published the Intelligent Investor in 1949, but a year before that in 1948, he bought 50% ownership in Geico for $712,500. This represented 20% of the fund's assets, which was remarkable considering the manager's mandate regarding adequate diversification.
The investment itself and the fund assets may not look large at about $7.5 m and $37.5 m at today's values. But a large part of the fund was exposed to the prospects of just one business. Ironically, even when the SEC had issues with the fund owning the insurance firm, Graham did not back out. He felt the price was moderate in relation to earnings and assets. Geico wasn't even a bargain for the master investor who researched for undervalued securities with adequate of margin of safety. Even when the stock was later priced much higher than what Graham felt as a fair value, he did not sell it, for he considered Geico, a family business. This was unusual for Graham to have developed a biased fondness to the stock. Heck, who cared? The stock did very well.
By 1972 though the value of that investment had reached $400 m which had to be distributed to the fund's shareholders as per the directives of the SEC. Nevertheless, there was an important result of this investment by Graham's own admission: The aggregate profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions. More importantly, he also acknowledged the role of luck: One lucky break, or one extremely shrewd decision - can we tell them apart? - may count for more than a lifetime of journeyman efforts.
In 1951 Warren Buffett as a 21 year old put 50% of his capital at the time in Geico. By next year he made a cool profit of about $5,000: 350 shares bought at $29, and sold at $43. The cost of investment in today's value is nearly $100,000; Buffett was an able investor early in age. Later as the stock fell to $2 in 1976, he again started buying Geico, and by 1985 had raised the ownership to 50%, and by 1995, Geico became Berkshire Hathaway's 100% subsidiary. The maximum courage he demonstrated was in 1976 when the business wasn't doing well at all and was facing huge trouble in terms of growth and survival.
The thing is if your work is investing, and even if you are shrewd or lucky enough to put your entire cash into one or two businesses, and they do very well to take care of your life's money needs, there is another problem that you will have to tackle: What will you do while your cash is passively betting on these two extraordinary businesses? You gotta have another exciting calling to spend your life. Being a couch potato is fine if you find it a lifelong fun, with nothing else to do. For the rest, there has to be something else.
A five to ten stocks investment portfolio is what I like and find exciting. That keeps me busy at work, and also entails me to have fun.
The investment itself and the fund assets may not look large at about $7.5 m and $37.5 m at today's values. But a large part of the fund was exposed to the prospects of just one business. Ironically, even when the SEC had issues with the fund owning the insurance firm, Graham did not back out. He felt the price was moderate in relation to earnings and assets. Geico wasn't even a bargain for the master investor who researched for undervalued securities with adequate of margin of safety. Even when the stock was later priced much higher than what Graham felt as a fair value, he did not sell it, for he considered Geico, a family business. This was unusual for Graham to have developed a biased fondness to the stock. Heck, who cared? The stock did very well.
By 1972 though the value of that investment had reached $400 m which had to be distributed to the fund's shareholders as per the directives of the SEC. Nevertheless, there was an important result of this investment by Graham's own admission: The aggregate profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions. More importantly, he also acknowledged the role of luck: One lucky break, or one extremely shrewd decision - can we tell them apart? - may count for more than a lifetime of journeyman efforts.
In 1951 Warren Buffett as a 21 year old put 50% of his capital at the time in Geico. By next year he made a cool profit of about $5,000: 350 shares bought at $29, and sold at $43. The cost of investment in today's value is nearly $100,000; Buffett was an able investor early in age. Later as the stock fell to $2 in 1976, he again started buying Geico, and by 1985 had raised the ownership to 50%, and by 1995, Geico became Berkshire Hathaway's 100% subsidiary. The maximum courage he demonstrated was in 1976 when the business wasn't doing well at all and was facing huge trouble in terms of growth and survival.
The thing is if your work is investing, and even if you are shrewd or lucky enough to put your entire cash into one or two businesses, and they do very well to take care of your life's money needs, there is another problem that you will have to tackle: What will you do while your cash is passively betting on these two extraordinary businesses? You gotta have another exciting calling to spend your life. Being a couch potato is fine if you find it a lifelong fun, with nothing else to do. For the rest, there has to be something else.
A five to ten stocks investment portfolio is what I like and find exciting. That keeps me busy at work, and also entails me to have fun.
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