Exactly how many stocks should you own? A dozen? 50?
How about 150?
Living the philosophy
Anurag Gupta, an "average Joe" retail investor like you and me, owns close to 150 holdings. He's the poster child for a diversified portfolio.
We're pro-diversification around here. In fact, Fool co-founder Tom Gardner has said that "[Diversification] compels investors to regularly add money and to not worry so much about where the overall market is." And, as Tom points out, "A diversified portfolio spreads the risk."
That's a nice combo.
Mr. Diversification himself
Make no mistake, though: Gupta doesn't diversify for diversity's sake. He's outperformed the broad market with this strategy, and he's had fun doing it.
Gupta started investing about six years ago, not long after the dot-com bust and the Enron scandal. His first stocks included FedEx (NYSE:FDX) and Infosys (NASDAQ:INFY), which he still holds today. From the outset, Gupta knew that a well-balanced portfolio would be important to his long-term success, but he didn't set out thinking he'd own more than a hundred equities.
Is he overly diversified? Master investor Shelby Davis held a portfolio with more than 1,000 holdings. After a lifetime of investing, he'd turned a $50,000 account into more than $900 million. As Mr. Davis famously said, "My father taught me to ask how much you can lose before you even dream about how much you might make."
Gupta uses his portfolio diversification strategy in much the same way: to manage and reduce his risks.
Although there's a concentrated focus on risk management, Gupta told me that his returns haven't suffered for it. (And, as you'll see later, he keeps a lid on excess trading costs.)
How he does it
His investing strategy is quite simple: He keeps his bets small, doesn't break the bank on any one stock, and remains patient in his overall portfolio. Typically, Gupta keeps new positions to about 0.25% of his entire portfolio.
That's not to say every stock has that weight. His largest holding is the extremely well-run conglomerate Berkshire Hathaway (NYSE:BRK-B). (We can all stand to splurge a little on a company with credentials like that!)
As Gupta shows, you don't have to be a millionaire to own a broad portfolio. And you most certainly don't have to spend big to win big.
His initial stock purchases are usually between $150 and $500. He'll put varying levels of cash in differing stocks -- more in dividend plays than in small caps, for example. (Here's a good example of proper diversification.)
How can he do that without getting eaten alive by trading costs? Simple. He's a discount shopper.
As Gupta told me, "Low-commission trading to enable $300-size purchases is here to stay." Heck, we may be moving closer to no-commission trading. Because Gupta has multiple accounts with Zecco, he gets 240 commission-free trades a year. The increased availability of zero- and low-commission trading sites makes it possible to purchase a large number of stocks in small lots without stunting your portfolio's growth. If you don't have zero-commission trading, a good rule of thumb is to keep stock commissions to less than 2% of your buy price.
What's he eyeing today?
Gupta has been buying shares of Apple (NASDAQ:AAPL) in recent months, and he's looking at a few companies on his watch list, including smaller financial-related companies American Capital (NASDAQ:ACAS) and MVC Capital (NYSE:MVC). He's also watching some emerging markets; he's high on Melco Crown Entertainment (NASDAQ:MPEL), a casino in Macau, because he sees sound management and a solid business plan with superior growth opportunities.
He generally chooses stocks that interest him. That's a good rule to live by. You'll not only likely stay within your circle of competence, but you'll also be able to follow the business and pick up on valuable trends.
That's not to say you should buy only stocks you like. Gupta is the first to warn against falling in love with a stock … and becoming biased in your analysis of it.
The key takeaways
Not every investor should own more than 100 stocks. Not every investor will want to, either. But Gupta's diligent diversification strategy has a couple of lessons for us oddlot retail investors:
- No stock picker is perfect. Peter Lynch once said that in his line of work, if you were right six times out of 10 times, you'd be pretty good. I hate to break the news, but we're likely no Peter Lynch. A diversified portfolio will pad your portfolio against the inevitable.
- Keeping trading costs low is extremely important -- the less money you give to a brokerage, the more you'll allow to compound over the years in your stock holdings.
The Foolish bottom line
Finally, Gupta has a blast investing in the market. This is serious business, but it can be a lot of fun.
"Having fun" is so important that Fool co-founders David and Tom Gardner made it one of their seven core principles at Motley Fool Stock Advisor. (Another of their other core tenets is "Diversify, diversify, diversify.")
Recommending and holding a wide variety of companies has worked out well at Stock Advisor. Since inception in 2002, David and Tom's picks are beating the market average by more than 40 percentage points. You can check out all their recommendations and research for free with a 30-day trial -- just click here to learn more.
Hilary Schronce does not own shares of any company listed. The Motley Fool owns shares of Berkshire Hathaway. FedEx, Apple, and Berkshire are Motley Fool Stock Advisor recommendations; Berkshire is also an Inside Value pick. Melco is a Global Gains selection. American Capital is an Income Investor pick. MVC Capital is a Hidden Gems recommendation. Berkshire is also an Inside Value selection. The Fool has a disclosure policy.
