A) A small stock trader (long/short investor) with less than $100,000 stock trading/investing capital and who spends over 20 hours a week on his indie stock trading/investing “small business” should keep about 5 stocks, preferably from the same sector, in his or her portfolio – tip from my small book “The small stock trader.”
About 6 years ago, when I was just starting trading stocks, I was always wondering on how many stocks I should focus – that is why I decided to make this small article that can be a little helpful for other beginning small stock traders, as the Internet is full of questions like “what is the best / optimal number of stocks to have in portfolio?”, “How many stocks should you keep at a time?”, “How many stocks should you own?”, “In how many stocks should I diversify?”, “How many stocks to buy?”, etc.
One of the main reasons that I am saying that you should focus on about 5 stocks is that if you follow/research properly 5 stocks, you will notice that it takes about 20 hours a week, so the more stocks you have, the more time it will take. Furthermore, if you focus stocks are from different sectors, it will also require extra time to keep track of a few different sectors. So, by focusing on about 5 stocks from the same sector, you will be able to use your little time, money, and skills/abilities more efficiently than if you had to focus on a dozen stocks from different sectors.
“Many great stock investors like Warren Buffet and Peter Lynch also recommend to keep about 5 stocks in your portfolio at a time. Most of the great stock traders such as Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, and William O‘Neil held only a few stocks at a time, often within the same industry. Edward Lampert’s hedge fund also keeps most of its billions in 4 retail/consumer stocks. Even many full-time working market makers and sell-side stock analysts focus only on a few stocks…… trust me when I say 5 simple focus stocks is enough! Sometimes I am even short of cash, as even with five stocks, there are enough opportunities. Furthermore, I sometimes find it challenging to thoroughly research my 5 simple focus retail/consumer small caps, despite spending about 30 hours a week on them. Remember that focus is the key, and over-diversification may even damage your performance – again, quality not quantity.” – quote from my small book “The small stock trader.”
In one of his books Peter Lynch had a brilliant remark that having stocks is like having kids, so you should not have more than you can handle:)
I hope the above small article was a little helpful!
Mika (author of “The small stock trader”)