It's been a busy month for the Rule Breaker Investing podcast team: Between the regularly scheduled episodes and the bonuses, listeners have gotten more David Gardner than ever. But he's not done quite yet, because as is his wont, he's wrapping up by responding directly to questions and comments. In this mailbag episode segment, he brings back a frequent guest, Fool analyst David Kretzmann, to help him tackle some questions about the famous Gardner-Kretzmann Continuum, which defines the range of individual stocks an investor should hold.
One listener has tilted his portfolio toward the high end of that continuum, and is wondering if he's gotten too diversified. On the other hand, there are just so many tempting stocks. Another is curious about how Gardner culled down the 200 or so stocks from the Supernova universe to the 55 he personally owns. Listener No. 3 notes that when a person is forced to boil down a large list of favored stocks into a small one, they seem to pick the cream of the crop. Listener No. 4, however, has had the opposite result by going too far in that direction.
So how many stocks should be in your portfolio? The answer is actually fairly simple.
A full transcript follows the video.
This video was recorded on May 30, 2018.
David Gardner: Rule Breaker mailbag item No. 4. This one comes from Paul Spangler, writing in from Portland, Oregon. "Hi, Dave! After trying to figure out the stock market on my own for a couple of months, I found The Motley Fool, subscribed to Stock Advisor, Rule Breakers, and Hidden Gems. I'm happy to say I've had some amazing results and have seen some of my stocks grow over 200%, like Shopify, Silicon Valley Bank Financial, Align Technology," a couple of Rule Breakers that we love in that list, "and a couple more over 100%, like Match Group, PayPal, Atlassian, Marriott, Nvidia, Netflix."
"I recently started listening to The Motley Fool Money and Rule Breakers podcasts on my commute to work and to school for my MBA degree. I'm enjoying my MBA classes even more now, because the way in which you discuss companies, their performance, metrics, and strategies is almost exactly what I'm learning about through case studies and class discussion, which is pretty cool. I'm crossing my fingers I get chosen for one of mailbag readings on your podcasts, so here it goes." And, ka-ching! You sure did, Paul!
"Here's my problem," he writes, "I have major FOMO." I think a lot of us recognize that acronym these days. David?
David Kretzmann: Fear of missing out.
Gardner: Indeed! "When it comes to investing in stocks." Paul goes on, "It seems like almost every stock recommendation from The Motley Fool service is appealing to me in some way, shape or form. And being a 31-year-old focusing on saving for my future and growing my investment portfolio over time, I'm open to some of the more high-risk, high-reward stocks. In a previous podcast," and this is an allusion to the Gardner-Kretzmann Continuum podcast, David.
Kretzmann: OK, excellent!
Gardner: That's why I'm so glad you're here with me today. "In a previous podcast," Paul says, "You mentioned that a good rule of thumb would be to own a number of stocks close to your age. So, by that "rule," I should own around 30 socks. I counted up my total number of individual stocks that I owned and discovered that I'm invested in 80 different companies, which is far more than I have time to keep tabs on and really dig into outside of The Motley Fool updates. On the one hand, I know I probably have too many stocks. But on the other, if I hadn't invested in a lot of these companies I'd never even heard of then, I would have missed out on some great returns. Hence, my Fear of Missing Out.
"So, what is the Foolish thing to do now in my situation? Should I narrow down my companies to 30 that I like? If so, how do I go through the process of thinning out my portfolio? I've been more inclined to buy a new stock, let's say $1,000 at a time, than I am to reinvest in a stock I already own that's done well. So, how do I resist the urge to invest in a new company? Thanks in advance for any advice you may have on this. Thanks for creating such a great community of Fools, etc. etc., Paul Spangler."
David of the Kretzmann portion of the Continuum fame, David, what do you think?
Kretzmann: Well, I'm actually closer to Paul's situation. I think, as we talked about on our Gardner-Kretzmann Continuum podcast, I probably own 70-75 stocks. Now, I probably actually added a few more since our last podcast. And I'm 25. So, the way I look at it is, you can own a lot of stocks, but what really counts is your allocation to your core holdings. I've been trying to focus more on something, David, that you talk about, adding to your winners. I think, as Paul highlighted, it can be easier to buy something new than add to something that you already own, especially something that's gone up. I'm trying to focus more on portfolio allocation that way. So, in a sense, you can own 70 or 80 stocks, but you're still heavily concentrated in your top ten or 15 ideas.
I refer back to Peter Lynch, the famed investing mutual fund manager of Fidelity Magellan in the 80s, an incredible track record. People would joke that Peter Lynch never found a stock that he didn't like. I think at one point, he owned over a thousand stocks in Fidelity Magellan. He owned hundreds of stocks, at least.
Gardner: So, by the Gardner-Kretzmann Continuum --
Kretzmann: He was breaking that rule.
Gardner: -- he was a Methuselah!
Kretzmann: He was breaking the rule, David.
Gardner: He was 1,000 years old. He might be!
Kretzmann: [laughs] That might be the secret. I think Peter Lynch approached it in a similar way, where if he found a company that he was intrigued by and wanted to follow, he would buy a little bit. He didn't necessarily need to establish a full position. Of course, the performance of the fund would still be driven largely by the top ten or 15 or 20 holdings.
So, I approach building my portfolio the same way. I think, especially if you are at a younger age, you have decades ahead of you to invest and accumulate positions over time in your favorite companies. I don't think you necessarily need to worry so much about fine-tuning your portfolio right away if you're 25 or 30 or even 40 or 45, because you still have decades in front of you to invest and build that portfolio.
Gardner: And, once again, one Dave to another, I think we agree on this. One thing I want to make clear to Paul and everybody listening is, the Gardner-Kretzmann Continuum -- first of all, if you don't know the GKC, if this is an acronym or a concept that's alien to you, just page back a few weeks in this podcast and you'll see and be able to hear it in its original form.
I think both of the Daves here agree that if you're 31 years old like Paul Spangler and you're inspired to think you should have about 31 stocks, that's not a maximum. You can certainly go and have 80 stocks. In my case, I have 55 stocks, and I'm 52 years old. But, I don't think there's any upside number, really. I think a lot of it is just, do you like what you own? Are you happy the way you're invested? Do you feel like you have the time to keep up? And if you don't have the time to keep up, do you have a trusted source -- let's say, in this case, maybe The Motley Fool -- that's keeping up for you, allowing you to own whatever size of portfolio you want to?
Kretzmann: Yeah, absolutely. For me, it really helped finding a tool like Personal Capital, that's what I personally use, where it'll essentially aggregate all your holdings from all your accounts and you can easily see your total allocation to different stocks across your accounts. I think, in my case, between my retirement accounts, my 401-K, my individual accounts with four or five different brokers, it was hard to keep track of what I owned, how much I owned, and where I owned it. But with a tool like Personal Capital -- and I think there are some others out there, that really, for free, they'll aggregate those accounts, show you the allocations -- for me, that's really helped from a portfolio management perspective, to think, "Oh, I feel like I should have more exposure to company A or B." Or, "Maybe I have a little bit too much concentration in this one company, maybe I'll hold back on adding to that one."
So, I would encourage you, especially when you have so many stocks, find some sort of tool, even if you do a spreadsheet on your own, just to get a sense for what your allocations are across the board.
Gardner: Alright, great. Let's tie a bow on Rule Breaker mailbag item No. 4. We have five, six, and seven. And as I look them over here with time running out, I see there's a lot of similarities between these. David, if you're kind enough, will you hang around the microphone a little bit longer?
Kretzmann: I'd be honored, Dave.
Gardner: Great. I'm just going to share these, and we'll just kind of keep the conversation going. Obviously, a big theme of this week's podcast is, how many stocks should you have in your portfolio? What about fear of missing out? A lot of these dynamics.
Mailbag item No. 5. A quick tweet. This one from @chadhuggins1. Chad wrote, "David, you have around 200 active stock recommendations." That's true. When you add together all my stock picks in Stock Advisor and all my stock picks in Rule Breakers, and you sum them and you call that the Supernova universe, which is what I call it, because we have Motley Fool Supernova, which is a service that invests exclusively in all of my picks -- it comes to about 200 stocks.
So, Chad goes on, "But you only have 55 stocks in your personal portfolio. What is your portfolio strategy? Personally, I have a hard time not investing in every great company I learn about." I think we're hearing some more FOMO going on here, David. Maybe part of the consequence of being a Motley Fool fan and owning some of our services is, because we tend to keep streaming ideas, people hear something like, "That sounds good to me! I'll buy that one, too!"
Kretzmann: Yeah, it's something I personally have run into. I'll come across a company and get really excited about it. It's like, "I want to own a little piece of this." I think the beauty of brokerages like Robinhood is, you can own just a couple shares of a stock that's trading for $35-50. You can start small. And then, for me, having that skin in the game, it motivates me and encourages me to follow the story over time, and then maybe just build a position up over time as I have the means and interest to do so. There are different ways you have to do it. I feel like you don't need to be at a point where you have to jump in with a full starter position right away. You can start small and just follow the story and build it out over time.
Gardner: Absolutely! Side note, David. Did you know that Robinhood these days is being financed at a multi-billion-dollar valuation?
Kretzmann: It's an impressive company. I've actually listened to several podcasts with co-founder and CEO of the company. Man, that's one of the companies at the top of my list that I wish was public.
Gardner: It didn't start too long ago, either! I think the company is something like five years old, or some insane number, where they have just launched with a free mobile app, getting people started investing, which we love here at The Motley Fool, and really parlaying that into a significant business.
Kretzmann: Yeah. I think, so far, they already have several million people signed up with accounts. They're really focused on that millennial audience. I think the average age of their users is something like 25. Really, a powerful business model. This is kind of a tangent, but looking at Charles Schwab, a popular brokerage account that started in the 70s, when they started out, the average age of their account holders was about 25. Today, the average age is about 55 or so.
Gardner: This sounds like me! Keep going!
Kretzmann: There you go! I think you'll see something similar with Robinhood. As we know, these platforms are very sticky once you open an account with these different companies. I think Robinhood has just done such an incredible job at capturing that younger millennial audience. I suspect that whole crowd will grow with them over time. And, they plan to offer more and more different banking and financial services over time. They're certainly not going to stop with stocks or cryptocurrencies. They'll keep going far beyond.
Gardner: Rule Breaker mailbag item No. 6. This is probably my favorite note of the month, so thank you, Kurt Ilia, for this note. "Hi, David! One of the things I love about investing is that, as Yogi Berra once said, 90% of the game is half mental. Or, to put it in Buffett's words, it's an easy game if you can control your emotions. So," Kurt writes", any time I notice a potential mind hack that can lead to better results, I get curious."
"As I listened to your April 18th podcast on Five Stocks That I Own That You Should, Too, I was struck by your comment that all of the five stock samplers you've presented over the past three years have handily beaten the market. If memory serves, your accuracy rate," that would be your percentage of winners against losers, "has tended to be better for those picks than your overall average as well, and there are only rarely any stocks that have actually lost money in them. Even for someone with your great track record, that is beyond impressive." And, I think I've said many times before, Kurt, thank you, it's beyond lucky, as well. There's no way we can possibly keep this remarkable streak going. But, as long as it is, #RBIStreak.
Kurt goes on. "This got me to reflect on the fact that a small group of stocks that I have helped my 13-year-old son pick for his portfolio, which is a subset," Kurt writes," of my own set of about 50 stocks, routinely beats my own portfolio in the market. I'm always careful when I pick the stocks for my son's portfolio. But when I have to look at my son and suggest that he put his hard-earned cash behind a company, perhaps it's bringing out a bit of extra diligence or stock-picking wisdom in me. You mentioned that the new batch of stocks that you picked was for your fellow North Carolina alumni at an event. While not the same thing as picking stocks for a family member or friend, I'm guessing the dynamic was similar as you narrowed down the list to share with your fellow Tar Heels."
"To conclude," Kurt writes, "and so, it got me thinking. Is there something to this? When we're forced to boil down all of our stocks to a small number of the best ones, to advise people we care about, does this discipline actually lead to better performance? Or is this just an illusion based on survivorship bias in our own portfolio? Thanks for all the good that you and The Fool continue to do for the world and for all the fun it leads to along the way. Fool on, Kurt."
Well, I love that note, David. The truth is, when I think about my own dynamic of picking five stock samplers on this podcast, or investing for my kids, or for my wife's portfolio -- typically, I've created a better portfolio for my wife than my own portfolio. We have separate portfolios. Of course, we've been together 27-plus years, I think we think of them all as one, but the truth is that she has hers and I have mine. And she's out-performed. And I'm picking all the stocks for her portfolio.
And when I give speeches, I stand up in front of people and I say, "Here are seven stocks that I like. I'm going to make seven points and I'm going to tag a stock to each of them." And those have typically done really well. A good example was when I spoke to Conscious Capitalism in the year 2012. I picked ten stocks in front of the Conscious Capitalism crowd that year. In fact, the CAPS page is CC2012Culture, because I was picking companies based on great cultures. And those 12 companies have, on average, outperformed the market over these six years by 396%! Which is hugely better than how I would normally have done with any of my own portfolios!
So, I think that there really is something to this, David. Have you found that you're investing for anybody else, your family or your friends so? I know you're a younger guy. Or is it just your own portfolio?
Kretzmann: No, I think that does bring an extra element of discipline. You really want to be sure you're focusing on quality ideas. I help run my mom's retirement accounts. In that case, I want to really be sure I'm bringing the cream of the crop to her portfolio. So, I think there is something to that.
Gardner: I really do, too. And I think it's a great point, Kurt. I'm going to remember that. I think that should be memed. If that's not already a meme, that should be. I don't know if the Ilia Phenomenon will quite rise to the status of the Gardner-Kretzmann Continuum, but the Ilia Phenomenon, I think, is real.
Kretzmann: I think so.
Gardner: Alright, that takes us to our final mailbag item. As I said, it's kind of one ongoing conversation, so let's just keep it going here to close this week with Steven Asperos, who wrote in this way: "Dear David, I've been somewhat of a Fool since first reading your book, The Motley Fool Investment Guide, back in the late 1990s. I find your concepts on stock investing interesting, but wasn't sold on your philosophy until a few years ago. I became an early subscriber to your services, gradually adding more of your services. I'd pick and choose from your top recommendations, add those to my brokers, more conservative stock choices. Foolishly," that's with a small F, "I never fully committed to your philosophy, nor any of its missions as specifically instructed, and I got burned badly purchasing large stakes in stocks such as Ambarella and Chipotle," which are Rule Breakers with mixed results over these years, some great and some horrible for both of those companies.
"However," Steve goes on, "when I sold my business two years ago, I decided to try a Foolish investing experiment. I took the $180,000 in my wife's IRA and I bought 36 of my favorite Motley Fool recommendations, $5,000 a stock. I would buy and not sell. I wanted to see which ones really threw off the most profit. I wanted a larger sample size, because I kept picking your losers while the winners were killing it. Well, what happened," Steve writes, "blew me away. Stocks that I never would have bought turned out to be the biggest winners. Companies like Align Technologies, up 182%. 2U, up 187%. And Shopify, up 163%. Amazingly, the only stock in the red was Kinder Morgan. The portfolio was up 69% over the two years."
"After all that, my question is, do I have too many stocks to be really Foolish? Does the mutual fund nature of this portfolio make it too spread out to hit real home runs on stocks like the ones just referenced? I love you podcast," Steve closes. David, we might sound like a broken record here, but do you want to add a thought into the cauldron here before we say goodbye?
Kretzmann: Well, I think the answer to Steve's question here is no, I don't think you have too many stocks. I think, especially, the longer your time horizon, the less the number of stocks you own matters. Even if you own a little bit of a future multi-bagger, 10-bagger, 20-bagger, 30-bagger, a little bit is all you need. That's a quote from Tom Engle, TMF1000, a beloved longtime Motley Fool contributor. He says, "If a company is going to be the next big thing, a little bit is all you need to own. If it's going to be a dud, a little bit is all you need. You'll be glad you only had a little bit." I think there really is something to that. Even though I invested a small amount in Netflix as part of the first batch of stocks I bought 13 years ago, it's still the largest holding in my portfolio today. It's just been a staggering performer, well over a 100-bagger now, thanks to you, David, and your recommendation.
So, starting with a small amount or investing a flat amount across multiple companies. If you can hold those companies for ten-plus years, I think that's a great, Foolish approach.
Gardner: When we think of what Kurt Ilia talked about, about how we typically will do better for our family members than for ourselves, it sounds like that might have just happened right here. It was illustrated. It's kind of funny to think that Steve took his wife's IRA and just sort of threw it out into The Fool stocks there, not his own. But look how she's done! And Steve, I bet you did well selling your business. But, 69% is an awfully good return for this two-year period.
Kretzmann: Oh, yeah.
Gardner: I think a lot of the lessons that have come through this week's podcast are implicit in that final mailbag item. I agree with David. Steven, I don't think that you have too many stocks. And I don't think anybody needs to think they have too many stocks, unless you find yourself stressed out about that and you want to thin it down. But, I don't think there's any convincing math to me that suggests that we should have smaller, not larger portfolios, or that there's some cut-off that you shouldn't go beyond, unless it's something that you feel yourself, and your own time management, and any anxiety or not that you'll have.