Mental Models discussed in this podcast:
- Concentration vs Diversification
- Hurdle Rate
- Circle of Competence
- Conviction
- Opportunity Cost
- Satisficing
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Show Outline
The full show notes for this episode are available at https://www.diyinvesting.org/Episode120
How many stocks should you own?
- As many as you can that meet your hurdle rate?
- Only the best opportunities available?
- Optimal vs Satisficing
Constraints on Holdings:
- Time
- Circle of Competence
- Conviction
Additional Thoughts
- Collector of Businesses
- Hypothetical:
- What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge.
- Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10.
- What are you buying when buying a stock?
- Concentration: " The number of stocks you own is dependent on how you view yourself as an investor."
- Is it possible to produce alpha?
- If yes, concentrate
- If no, diversify
- Are you a good investor?
- If yes, concentrate
- If no, diversify
- Conviction
- If yes, concentrate
- If no, diversify
- Is it possible to produce alpha?
Summary:
How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction.
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