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How Many Stocks Should You Own?

“Never put all your eggs in one basket.” ~ Proverb

“Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket.” ~ Andrew Carnegie

The fight of putting all your eggs in one basket and not doing so seems as old as the egg itself.

The story is the same when it comes to diversifying (eggs in many baskets) or concentrating (eggs in very few baskets) your investment portfolio.

So if you are grappling with this question – “How many stocks should I own to make a diversified portfolio?” – don’t worry for you are not alone in struggling with this question.


In this post, I will try to bring together a few theories on this topic of “concentration versus diversification” and see where they can lead us to.

Let’s start from the start, and see what the father of value investing, Ben Graham, had to say on this subject.

Diversification Vs. Concentration
In the fifth chapter of The Intelligent Investor, titled “The Defensive Investor and Common Stocks”, Graham lays down the foundation for picking stocks under a section titled – Rules for the Common Stock Component.

Here is what he wrote…

There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.

He added…

Each company selected should be large, prominent and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.

So Graham advises you to have anywhere between 10 (not less) and 30 (not more) companies in your portfolio

In 1952, noted economist Harry Markowitz supported Graham’s view and wrote that it is inefficient to put a large holding in just a few stocks, and that investors should diversify across a large number of stocks. He wrote…

Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim.

This was in contrast to what John Maynard Keynes had said much earlier in 1934…

As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.

It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.

One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.

Warren Buffett supported Keynes view, and included in his letter to shareholders of Berkshire Hathaway in 1991 this very quote from the economist.

It was Philip Fisher who taught Buffett the benefits of focusing on just a few investments. He believed that it was a mistake to teach investors that putting their eggs in several baskets reduces risk.

The danger in purchasing too many stocks, he felt, is that it becomes impossible to watch all the eggs in all the baskets.

As per Fisher, buying shares in a company without taking the time to develop a thorough understanding of the business was far more risky than having limited diversification.

Here is what Buffett wrote in his 1966 letter to shareholders…

Anyone owning such numbers of securities (like 100) after presumably studying their investment merit (and I don’t care how prestigious their labels) is following what I call the Noah School of Investing – two of everything. Such investors should be piloting arks.

While Noah may have been acting in accord with certain time-tested biological principles, the investors have left the track regarding mathematical principles. (I only made it through plane geometry, but with one exception, I have carefully screened out the mathematicians from our Partnership.)

On the point of “over-diversification”, Buffett quoted the academician Billy Rose, who said…

You’ve got a harem of seventy girls; you don’t get to know any of them very well.

In favouring concentration, Buffett wrote this in 1993…

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury.

He also wrote…

…if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk.

I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices -the businesses he understands best and that present the least risk, along with the greatest profit potential.

In the words of the prophet Mae West: “Too much of a good thing can be wonderful.”

Seth Klarman wrote this in Margin of Safety

Even relatively safe investments entail some probability, however small, of downside risk. The deleterious effects of such improbable events can best be mitigated through prudent diversification.

The number of securities that should be owned to reduce portfolio risk to an acceptable level is not great; as few as ten to fifteen different holdings usually suffice.

Diversification for its own sake is not sensible. This is the index fund mentality: if you can’t beat the market, be the market.

Advocates of extreme diversification – which I think of as Portfolio Management and Trading over-diversification – live in fear of company-specific risks; their view is that if no single position is large, losses from unanticipated events cannot be great.

My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings. One’s very best ideas are likely to generate higher returns for a given level of risk than one’s hundredth or thousandth best idea.

Buffett’s “Twenty Punches”
Warren Buffett is supposed to have said…

I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime.

And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.

The problem with most of us investors is that, too often, we scatter money around while saying to ourselves, “Okay, let me throw a little money in this stock and little in that stock and then see what happens. At least, one of the stocks will work!”

Now, that’s a sure shot road to a hell lot of risk – first you don’t know where you are scattering your money, and then you think you are investing while the reality is that you are speculating in the hope of hitting the “right” stock.

Buffett wrote this in his 1993 letter to shareholders…

Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire’s capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically.

Therefore, we adopted a strategy that required our being smart – and not too smart at that – only a very few times. Indeed, we’ll now settle for one good idea a year. (Charlie says it’s my turn.)

I Go with Peter Lynch
Just to sum up, here is what the legends have advised on how many stocks you should own in your portfolio…

  • Ben Graham – 10 to 30…with each company being large, prominent and conservatively financed.
  • John Keynes – 2 to 3…companies which one thinks one knows something about and in the management of which one thoroughly believes.
  • Warren Buffett – 5 to 10…if you are a know-something investor, able to understand business economics and to find sensibly-priced companies that possess important long-term competitive advantages.
  • Seth Klarman – 10 to 15…better off knowing a lot about a few investments than knowing only a little about each of a great many holdings.

I personally hold around 12 to 15 stocks in my portfolio at a given point in time. The maximum I have had over the last ten years is 20, which I thought was too hard to manage given my limited attention span.

Anyways, if you don’t remember Buffett’s, or Graham’s, or Keynes’s, or Klarman’s thoughts on concentration versus diversification, I am sure you would remember Peter Lynch who said…

Owning stocks is like having children, don’t get involved with more than you can handle.

I have nothing to add!

What about you? How many stocks do you own in your portfolio? And is there a specific philosophy you practice on diversification versus concentration? Let the tribe know in the Comments section below.

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Comments

  1. Nitin Sharma says:

    I personally hold 30 stocks. Though it takes more time to do a weekly review(of any special news) and quarterly review of results, it gives ample opportunities to add at the right price as they all don’t in same direction move at same time.

    Personally I think, for buy and hold strategy below 10 is too less and more than 30 is too many. 15-20 is the right balance.

  2. Amit Singh says:

    How do you’ll track 10+ stocks? I presume that also includes understanding 10+ industries, and their dirty secrets. I maxed out at 6 stocks, meeting their management, competitors, and understanding the industry. Buffet’s idea of 20-punch card appeals to me i.e. about 1 new idea/year. Only after 10 years, could you build a portfolio of 10 stocks i.e. if you didnt exit others.

  3. Any thoughts on how many sectors to diversify ? Obviously the 15 stocks shouldn’t be spread across 15 sectors but is there any suggestion on this? Also, another question, in sectors/industries that are oliogopolistic, does it make sense to own the top 3 or 5 companies that make the oliogopoly? (after, of course, doing the basic due diligence of understanding business & looking at their financials)

  4. I hold 10 stocks in my portfolio now. And maybe a couple of more in my “watch list.” Only in IT sector, I hold two stocks otherwise I’ve picked stocks from different sectors. Cash/Cash Equivalent holdings ranges from 5-30% in the last six months. My view is if you’re convinced with your picks, then no need to hold as high 25-30 stocks as it gets increasing difficult to keep abreast in sector, read reports, annual reports, so on and so forth.

    I have never done “trading” and maybe in the future I may try with a small percentage of the cash I hold and that will be different to the ten stocks that I’ve in my core.

  5. Ravindar Thati says:

    thanks Safal, i am not a veteran investor, just started investing 1 year ago. your posts keep me educating to reach or be on the right path. Keep posting…
    so far i hold only 3 stocks. Cummins India, Cairn India and sadly a worst stock MiC Electronics.. but anyway so far my investment is after all 40k. i am keen now and very selective while choosing stocks.
    many Many thanks for educating small investors like me.

  6. Vishal, by far, one of your most important articles.

    I hold many stocks (embarrassed to even share the number here). That is because I am testing 2 portfolios.

    In one, I take the Walter Schloss approach of diversifying. Intellectually, I feel I am more closer to him than the brilliance of a Buffet or Munger. Also, Mr.Schloss worked with fewer resources, unlike Mr.Buffet. Also, as a small guy, I hardly have much resources to do detailed research. So I diversify. Mr.Schloss too worked on his own, with his son as a partner. In this portfolio, I cannot possibly know all the businesses well. But I look at their history to an extent, and what they do. Impossible to know them well, their industry issues, and the news flow.

    I have another portfolio, which is a bit more concentrated, and uses the Ben Graham approach of investing in large, prominent, & conservatively financed companies. Again, I cannot claim to know these companies intricately, I broadly know their business model, their products, and where they add value.

    The Ben Graham approach has worked better so far for me so far. But I think I will need 5 more years for me to decided which works better for me. I am sure I will evolve, and so will my style. Important thing is to know oneself with brutal honesty, and play within one’s abilities, not beyond those boundaries. That is the hard part, it is so easy to be self deluded about one’s abilities and about one’s place in the world!

    -Rajaram

  7. I follow diversification with Core and Satellite approach. There are 11 stocks in my core holding (boring, slow and steady growing stocks with industry leadership or professionally managed companies) and around 14 stocks which are undervalued, contrarian picks, small caps etc. The excess returns from satellite part will be invested into core holdings.

    Regarding the allocation, I will let market decide my allocation for individual stocks (based on attractiveness) as I am an SIP kind of guy. So far going good. I am happy that I had found out my style. My general theme is a dividend focused investing for which I require a diversified portfolio.

    Diversification or concentration depends on one’s ability and mentality. You see most of us have a concentrated portfolio when it comes to real estate or bullion. One has to first identify his style and based on that he should decide. We have so many greats each having their own style which worked for them. Investor can use their words as reference but should try to understand himself and come out with his own style.

  8. Srinath Mitragotri says:

    Thanks Vishal. This is interesting.

    On a different note, I would like to quote Ben Graham from James Rea’s paper: “Remembering Ben Graham”.

    He said:

    “Let me say that there is one other criterion that is seldom mentioned with emphasis, but that I feel is worth a lot of emphasis: the criterion of diversity. Even though one could find a number of stocks which meet our “buy” requirements using our ten criteria, Ben always suggested that we “just buy a little bit of each, really not trusting it too much, because there may be many other reasons, that you don’t know about, as to why the company might not do as well in the future”. And “to buy only a little bit of it so as not to emphasize any one, and to buy the stocks of other companies, again just a little bit, which also meet our criteria”.

    Further he says in the paper:

    “Ben said that his best performance record in the past was when the market was low enough to allow him to invest in over a hundred companies, buying just a few hundred shares in each company and so not “loading up” on any one.”

    I guess it all depends upon your own past experiences and what ever you are comfortable with.

    Cheers
    Srinath

  9. Reading other’s comments here I find myself a little embarrassed. Not because I have a huge list of stocks but rather very few (just six) where I have done slow accumulation for the past 3 years.

    Out of the six stocks one had been purchased without my detailed analysis (I have already mentioned this ‘disturbing’ detail to you earlier).

    I think most of the ‘blame’ (pun intended) should go to myself for being very conservative in my screening mechanism. My watchlist in screener.in contains only 11 stocks taken from the entire universe. Of which 2 are Pharma Stocks (not in my circle of competence), Abbott and Sun Pharma.

    That leaves 9 from which 5 I hold and the remaining one have reached the stars in terms of the price they are trading on.

    I really don’t think I can hold more than the ones I have on my screener, ever. Simply because of the work that is required in maintaining them. From reading up annual reports (including competitors, if any), news etc.over and above my office and ‘home’work :-).

    Regards,
    Shantanu

  10. I currently have about 11 stocks and one gold ETF in my portfolio. I learnt the hard way and through losses that its not worthwhile having dozens of stocks because it makes monitoring difficult, and taking corrective action when things go wrong becomes practically difficult. In the past (say 2007 and 2008) I accumulated several stocks and it even went above 20 stocks at one point. I bought stocks which I could understand but these were few in number, but later I got attracted to several others and accumulated more to avoid missing out. Later the results were devastating……difficult to monitor, difficult to book losses, difficult to hold good stock despite knowing they were fundamentally sound, etc.
    Finally I lost more money in losses, and high brokerage fee for frequent transactions.

    About 2 years ago I refined my portfolio to 15-20 range, and now its only about 10-15 and sometimes dips to single digits too.

    I believe that diversification is not just about having different stocks. You also need to diversify across other asset classes or investment/savings options. Keep some short term funds in fixed deposits, any excess cash could be in liquid funds/FDs, and long-term funds can be diverted to equity. Unfortunately FDs and fixed income is not good enough (in India) to generate positive returns (post inflation) so the only option is equity and gold ETF. In addition one can look at buying one property (real estate) for own use or investment (Whether you like it or not you need one property during your life time).

    When you have fewer stocks, you will be conscious about which stocks to pick and you will go for good quality names with strong financial pedigree. Moreover, your transaction costs will reduce and monitoring is easier. If things go wrong you know whether to book profits partially or fully. Similarly on occasions like dividend, bonus, etc, you will benefit reasonably if you have a substantial holding (e.g. for a dividend of Rs.5 per share if you hold 10 shares you hardly get Rs.50 as dividend….imagine you had lesser stocks and higher quantity – say 100 shares you would get substantial dividends or absolute returns). Though dividends, earnings are mathematically the same for 1, 10, 100 or 1000 shares, the absolute gains are different…….what i mean is your own conviction in the business that you understand and your ability to invest for long-term gains or returns from a business that delivers Return on Capital which exceeds its cost of capital by a decent margin. Large investors take a fairly bigger position but have done sufficient research,homework and are taking calculated risk, which they are able to manage effectively.

    However, I still believe in diversification provided its not overdone. Nevertheless, you can have dozens of stock ideas, which is acceptable, but you will finally shortlist and invest in the stock when the valuation and pricing is tilted favorably to your side. In short, invest in stock that is available at a significant discount to its intrinsic value.
    But to know intrinsic value you need to do your homework – it may not come out of thin air or based on guesses or intuition…..you have to do the ground work and be ready for the right opportunity!

  11. Akhilesh Pathak says:

    Dear Vishal and Tribesmen,

    Proper diversification seems inevitable for all of us considering the various risks associated with stocks investing- economic conditions ( companies like L&T and BHEL are impacted), management crookedness (Satyam was epitome of growth and’ Truth’ till we all got to know the actual truth !! ), geopolitical reasons ( Voltas was hit due to problems in Gulf countries), consumer behavior (Hype abt Jubilant Food,Gems and jewellery companies, demand for Titan’s products), cyclic changes ( metal and capital goods ) etc.

    On a lighter note, extent of diversification these days depends upon individual’s circle of influence ( numbers of broker friends who give hot tips, friends who heed to those tips and advise to buy the next Infosys, lure to catch the next multibagger, feeling of missing the bus, Mitali Mukherjee, Sonia Shenoy etc.) rather than circle of competence, research and value buying !!. I can vouch for all the above facts based on my own personal experience and behavior for last few years :)

    Personally, I hold less than 15 stocks and feel that its better to manage and track the business fundamentals of the sectors that these stocks belong to. After all investing is about identifying the businesses which are going to grow for a long time to come with sustainable margins and returns on capital employed.

    Its purely an individual choice as practitioners of both philosophies have demonstrated how the wealth can be generated over the long term. In-fact, courage, risk taking abilities, belief, past experiences, excess capital availability and many other factors play a role in the degree of diversification. All these traits being the completely people centric, its obvious that there will always be portfolios with under/ over diversification or concentrated one.

    Regards,

    Akhilesh

  12. 10 is enough for me, max 15.

    I can’t imagine focusing on more than 20 businesses :-)

  13. Currently I have 120% of my portfolio in a single company, ie 100% my funds and 20% leverage. Thats as concentrated as I could go.This is a personal choice based on the circumstances, some might call it excessive greed.

  14. M S S Murthy says:

    According to me the issues of diversification and the desirable number of stocks in one’s portfolio arises from the perception of uncertainty one has about investments in stocks.if we do our homework well the degree of uncertainty is greatly reduced and with it the need for diversification.Still certain amount of diversification is necessary to cover unforeseen risks in businesses. I was investing in stocks for past 33 years .In earlier days i used to have as many as 10 to 15 stocks in my portfolio. Now i have three .

  15. M S S Murthy says:

    Hi Mr Rakesh As I have indicated in my earlier post I have been interested and investing in Indian Stock Markets for the past 33 years .I have not scaled down my portfolio , the number of companies has been reduced to three to enable me to concentrate more.

  16. Maheswar Reddy says:

    Maximum of 5 stocks. There have been times when all my eggs have been in only one basket but this was in situations where i understood the business well. This strategy has worked well for me over the years and have no plans of changing.

  17. I have 11 stocks in my portfolio currently.

  18. Personally I think, atleast a 100 hours of research should go before even contemplating the entry in stocks. Atleast 25 should go in picking the stock for investing and atleast 5 should go in research before every subsequent transaction (buy/sell/additions/reductions). This is in addition of average 2-3 hours per month for each stock. With this kind of effort involved, a retail investor with stocks as secondary source of income should not have more than 6-7 stocks in his portfolio.

    Also I think no stock should have lesser allocation than the monthly salary. So if someone has Rs 50k monthly income, he shouldn’t invest less than 50k in any stock, even if he has to wait for 6 months before entering. I have a total of 7 stocks out of which 2 are shorts in Futs since it is not allowed in delivery…

  19. I have 11 shares in my portfolio and my portfolio is almost 30 lakh but i have 95 % of my money in 5 of them (clariant , Bajaj finance ,FRL,karuru vysya bank , tv 18 ) .Is it a right thing to do ?

  20. I think diversification should be done when following conditions are met
    1) Both companies are good stocks to buy. Their undelying value is a lot more than price.
    2) Both companies are from same sector. This may sound strange, counterproductive and purpose defeating but it is not as I will explain below.
    3) Both companies compliment one another.

    To put it in a nutshell, good diversification is like Dravid-Tendulkar combo. Both are batsmen, both are wonderful but their approaches are vastly different from one another. One attacks, other defends.

    To give my portfolio example, I have both Manappuram and Muthoot. In my opinion, they are both ridiculously underpriced and are gold loan firms. That takes care of criteria 1 and 2. However Muthoot is a lot more conservative than Manappuram. Muthoot gave growth even in bad times whereas Manappuram gave a loss in one quarter. But Manappuram has a lot more growth potential in good times and I believe gold loans companies are a wonderful thing for India in long run. So they are atleast Sehwag-Gambhir, if not Dravid-Tendulkar. I have done same thing with Dena Bank, Syndicate Bank and Bank of India.

    Good time for my portfolio, these last few days, though after a long wait :)

  21. I have 4. I guess it has got a lot to do with amount. For a pf of less than a crore its good to limit to below 5 and increase it to 7 to 8 after that. Doesnt make sense to have 15 stocks in a 10 lac portfolio. .The idea is to bet big once u know the story behind the stock

  22. I have been investing for a year now…thanks to Safal Niveshak I am trying to learn what NOT to do ;) but we all are human after all.

    I have 9 stocks in my portfolio and i think a portfolio with 12+ stocks will be a lot difficult to manage.

    Although I do have a question. If one has spare cash and only 8-9 stocks in his/her portfolio, should one wait for prices of his stocks to come down so as to buy more or look for other value creators and increase his portfolio size?

  23. I own 5 stocks. Stock Investing for Dummies says this depending on how much money you are investing into stocks..

    $10k or less = 2-4 stocks
    $10k-50k = 4-6 stocks
    $50k or more = 5-10 stocks

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  1. […] Peter Lynch said, “Owning stocks is like having children, don’t get involved with more than you can handle.” Here’s a post that brings together diverse thoughts on how many stocks you should own. […]

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