Two readers asked the same question from Atlanta and Albuquerque.
One wrote: Picking so many stocks means you’re just trying to get lucky and hit a few big winners. It reminds me of playing roulette, hardly a science.
And the other wrote: I’d like to hear your thoughts on how many different stocks an individual investor should have. It’s an issue I wrestle with. There’s the discipline argument. Limiting the number of companies forces you to be more selective. I have many things I want to buy, but I worry about having too many. I believe there is an important discipline in limiting the number of companies you own. By setting a maximum, you force yourself to identify investments that are less good that the alternative and shed them.
Everything you own is something else you don’t own. There’s an opportunity cost in every investment decision, even after we have made it. Every day we hold a stock is a day we miss out on putting our money somewhere else. Since we have a tendency to become emotionally attached to stocks, I think this is a good antidote.
The other argument against excessive diversification is that you end up essentially owning home-made index fund.
Vivian replied:
Good questions. How many stock to own? as many as you or your staff can track and follow. I am a big believer in diversification. Mayri Voûte, a money manager friend in Paris, says I have not a portfolio but a stamp collection. A Russian, she likes to gamble at roulette tables; I am a petite bourgeoise American and don’t.
I also do not believe in rebalancing, hooey put out by brokers to get business. I also do not believe in target prices for trades although I use them mentally when watching. You may have noticed there are no targets in global investing except from Frida Ghitis.
When you invest in a couple of dozen different markets in stocks with different personalities (yield, speculative, or boring) in different industries you are not creating an index because you are focused on performance one by one not on tracking a market index. I hate indexes, a lazy way to invest.
My main reason for not rebalancing is that I own gobs of my best ideas.. I did not take money off the table because it was there. I only sell if I can think of a reason to. Many share traders suffer from sellers’ remorse, even good ones. Last week I had to comfort Maurice, an Italo-Briton, for his having sold Berkshire Hathaway about a year ago and now having to buy it back for more cash. He sold because he made so much money with it. And so he paid part of that back, sob sob.
Another thing I do is trim my bets, buying and selling in little chunks until I am surer of things. My late great-uncle Jack Oppenheim, my first broker, used to say: “Vivian, fish or cut bait”. But that was when commissions (to him) were high and taxes also. This no longer is true. See below.
I violate the theology of investing preached by brokers, ETF promoters, and fund managers. I break their rules in real life and in Global Investing. They want you to trade a lot, rebalance, buy indexes, and leave it to their brilliant managers to manage your money. Fuggedaboutit.
*Deutsche Bank just launched a new Exchange Traded Commodities fund family which will appeal to the most mistrustful, nay paranoid, gold bugs. The “db ETC” investment platform will offer new index products initially on the Xetra (Frankfurt) Exchange and initially for gold.
Later it will offer ETCs for silver, platinum, and palladium there and on other European markets. It will also price future ETCs in euros (although precious metals markets are priced in dollars and always incur exchange risks for euro investors.)
Recent Deutsche research reports that total assets in ETCs across Europe grew by 145% in 2009, vs only 43% more in equities and 17% more in fixed income. ETCs are a popular way for investors to gain exposure to commodities without trading futures contracts or taking physical delivery of the commodities tracked. Deutsche fully collateralizes the Gold ETC using physical gold, with fully liquid trading by Deutsche acting as market maker.
db ETC also can provide access to Deutsche’s own “Optimum Yield” indexes to commodity investors seeking to minimize losses from the “rolling” of commodity futures contracts (contango, where the future price is higher than the spot).
Head of db x-trackers Thorsten Michalik said: “We expect to launch more than 30 products before June across Europe. We are also planning to launch db ETC on the underlying physical asset class for silver, the first product of its type brought to market.”
Deutsche’s ETC products are transparent and fully collateralized (with the actual commodities) and trade on regulated exchanges. The commodity indexes will have annual product management fees of 0.45%. while platform product fees are said to be low. Other costs may arise from products, underlyings, or collateral and will be made known to investors who monitor www.etc.db.com.
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