\u201cThe first rule of compounding: Never interrupt it unnecessarily.\u201d<\/p><\/blockquote><\/figure>\n\n\n\n
As investors, none of us know which companies will be the best compounders of capital into the future.<\/p>\n\n\n\n
But we can make intelligent allocations into different businesses, and hope one of them proves the ability to do just that.<\/p>\n\n\n\n
What also makes it interesting is that companies don\u2019t grow in a perfect linear fashion.<\/p>\n\n\n\n
You\u2019ll often sees bursts of production and growth, which is usually accompanied by their great stock performance over time. In other words, even the best businesses will have times of lull and times of great growth.<\/p>\n\n\n\n
Look no further than Microsoft, who was flat in the 2000s and then grew 17%+ annually in the 2010s!<\/p>\n\n\n\n
Same company, different bursts and lulls in productivity (and results).<\/p>\n\n\n\n
As investors, we can\u2019t constantly jump ship when a company we own has a lull, because every company will come across something like that eventually.<\/p>\n\n\n\n
What we need is patience. Allow companies to compound their capital over long periods. It may require putting up with subpar results for a time over its life.<\/p>\n\n\n\n
At the same time, we don\u2019t want to stay invested in businesses that are destroying value, which eventually leads to large shareholder losses.<\/p>\n\n\n\n
So, we can create a rule which works well when managing our stock portfolios, and it\u2019s to ask the question:<\/p>\n\n\n\n\u201cHas anything within the business fundamentally changed?\u201d<\/em><\/strong><\/p><\/blockquote><\/figure>\n\n\n\nGoing back to our Microsoft example… The company didn\u2019t grow much in the 2000s. It stockpiled cash and investments and really didn\u2019t have great places to invest to find that growth.<\/p>\n\n\n\n
But, its Microsoft Office platforms were still strong. They were still clear leaders in their core competencies; it was just that they were at a plateau.<\/p>\n\n\n\n
Contrast that to someone like Kodak.<\/p>\n\n\n\n
Kodak\u2019s big business was digital cameras, but nobody needed to buy cameras anymore because we suddenly all had cameras on our smartphones.<\/p>\n\n\n\n
No matter how well Kodak reinvested any capital, their core competency was chopped off at the knees, and it would be difficult to recover from that. Their main business model was dying, and the company died shortly after.<\/p>\n\n\n\n
Take that back to managing our portfolios. We need to discern the businesses with failing and obsolete models, while also having patience for companies that are temporarily struggling.<\/p>\n\n\n\n
That\u2019s why we look at the business itself, determine if it has fundamentally changed, and either sell it or hold onto it longer.<\/p>\n\n\n\n
Notice how that decision did not<\/strong> include the number of stocks in our portfolio.<\/p>\n\n\n\nThe Answer is Personal<\/h2>\n\n\n\n Which is why the answer to the \u201cgood number of stocks\u201d question is so personal.<\/p>\n\n\n\n
We\u2019ve all built our stock portfolios at different times. We\u2019ve all been exposed to different opportunities in the stock market at different times. There are times when Wall Street expectations are or are not aligned with actual company performance (in the future).<\/p>\n\n\n\n
Each decision we make on our individual stock holdings matter more than the number of stocks we have.<\/p>\n\n\n\n
That\u2019s <\/em><\/strong>why it\u2019s a 15-20 stocks framework<\/strong> rather than a rule.<\/mark><\/p>\n\n\n\nAs you continue to invest over your life, and accumulate good companies and trim those that are weakening, you might see those 15-20 stocks morph into 35-40 stocks, or 75-100.<\/p>\n\n\n\n
If it takes you a lifetime to get to 75-100, then you\u2019re probably doing alright.<\/p>\n\n\n\n
A portfolio like that is still much more concentrated than something like 500 or 1,000\u2014still by as much as a factor of 10.<\/p>\n\n\n\n
As you collect great businesses trading at good prices, you should eventually push through the 15-20 stocks framework if those companies truly are great.<\/p>\n\n\n\n
It\u2019s somewhere within those areas that I hope you find your balance.<\/p>\n","protected":false},"excerpt":{"rendered":"
The number of stocks in a portfolio can have a major influence on your ultimate results as an investor. Because of this, every investor must answer the question: what is a good number of stocks to own? The short answer is that there is no right answer. The much longer answer is that it depends […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[3,5958],"tags":[],"yst_prominent_words":[],"_links":{"self":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/15503"}],"collection":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/comments?post=15503"}],"version-history":[{"count":3,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/15503\/revisions"}],"predecessor-version":[{"id":25253,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/15503\/revisions\/25253"}],"wp:attachment":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/media?parent=15503"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/categories?post=15503"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/tags?post=15503"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/yst_prominent_words?post=15503"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}