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November, 2017


My mom has been good at this. She would invest tens of thousands of dollars at a time in a few carefully selected stocks, then follow them closely. An example is Ford Motor Company (F), beaten down in the 2008 financial debacle. Reasoning that, though it was then going through difficulties, there was no way Ford would completely go out of business, she acquired abundant shares when the price was only about 20% of its recent quote. In January, 2009, when they were selling for $1.94, one foolish investment service declared its shares the worst investment for the year. Mom did not manage to acquire Ford when quite that low, but still, including dividends, she had a very profitable run for quite awhile, concentrating her portfolio in a few such beaten down marvels. She sold most of her Ford shares closer to a subsequent price high of about $15. Even if only $14 a share when sold about early 2015, with Ford's roughly 4% dividend that probably worked out to a roughly 40% avg. annual total return. Had she not sold the shares but kept them for their yield plus avoidance of taxes on the later substantial price rise, her average annual total return to date would have been about 26%. (Though Ford's dividend was suspended at the time of her purchase and until 2011, in that year it was resumed with annual payments at 8% of her purchase price. By 2014, the dividend yield had risen to 20% of her cost basis. Even taking into account the earlier dividend omission, an estimate of 4% for her average Ford shares' yield is thus conservative.)

Small equity accounts are frequently better invested in one or two good mutual funds or exchange traded funds (ETFs). Yet even for stock portfolios of $200,000 or less, it is recommended that a person is better served having only a small basket of stocks, perhaps four or five, putting sufficient dollars in each to allow for excellent returns if they advance soundly, yet also monitoring them well, so if something goes wrong with one's original outlook that equity can be quickly replaced with a better one before losses get expensive. A billionaire's portfolio also works more efficiently with a smaller number of assets. Major investments in only 5-15 well chosen and supervised stocks may have more risk in the short-term, yet will also likely achieve better long-term returns than a significantly more diversified assortment. Warren Buffett offers the advice that we consider ourselves to have a limit of just 10 good investment ideas in our lifetimes, choose the better ones, and then be loyal to them, if we wish to improve on the record of the market in general. Were we content to not significantly beat the market, we might as well invest in good low-cost managed mutual funds, like the Vanguard Windsor Fund Investor Shares (VWNDX), or in ETFs that mirror an aspect of the market with which we are comfortable, for instance the Vanguard S&P 500 Index Fund (VFINX or VFIAX) or the Vanguard S&P Smaller Cap 600 ETF (VIOO).

For individual investors who like to dabble in stocks, what typically happens is that we have any number of supposedly good ideas but - since actually uncertain of our stock picking expertise - want to invest only a small percentage of liquid reserves in each. We can easily get portfolios of 30, 50, or even 100 assets. Our attention is then too scattered for following the holdings well. Even if some of them are lucrative, the effect of the winners on an overall portfolio will be minimal. A 50% gain on a 1% investment has, of course, only a 0.5% effect on the portfolio. Too commonly that is offset by losses in holdings we did not screen optimally at the outset.

Candidates for Our Concentrated Portfolio

Alliance Bernstein Holding L.P.AB$25.188.14%
American National Insurance Co.ANAT$121.232.73%
CVS Health Corp.CVS$69.952.90%
Gladstone Capital Corp.GLAD$9.748.62%
Instructure, Inc.INST$33.600.00%
McKesson Corp.MCK$138.141.00%
Mednax, Inc.MD$45.610.00%
Schlumberger, Ltd.SLB$61.533.15%
The Buckle, Inc.BKE$19.085.26%
United Therapeutics Corp.UTHR$120.260.00%

What if an investor has already bought dozens of assets and is dissatisfied with the consequent mediocre returns? Here are a few steps that might lead to better outcomes:

  1. Evaluate the holdings carefully. The aim is to reduce one's tradable securities to not more than 5 if the market value of the portfolio is under $200,000 and to no more than 10-15 if closer to a million bucks or so. Are there some securities that clearly are of less value or for which there is much less conviction than others? Weed them out as decisively as if clearing unwanted plants from a favorite garden patch.

  2. Are there others that are more volatile than the market as a whole but in which there would be great hesitation before investing in more shares if the share price tumbles. These probably should go as well.

  3. Are there some for which significant information in available from one's brokerage(s) and/or from a library version of "Value Line"? If so, one can compare and contrast the remaining assets so that, ideally, the few gems are kept while the still held dross is disposed of.

  4. What may be more difficult can be deciding among investment methods: are some assets there, for instance, because they provide good, reliable dividends while others have excellent growth potential? What percentage of the total does one want representing each approach? If a strategy comes out the loser in this comparison, the next step is to figure out which of that technique's stocks are stronger, then redeem the rest.

  5. In general, stocks do best and are available as bargains in more compelling numbers when acquired during substantial market downturns, for instance when my mom picked Ford as a good long-term investment. So, we can examine the remaining stocks in our portfolios with this in mind. Is each as good as what could be bought the next time the market is down 10, 20, or 40%? Or is it no longer a healthy enough part of the portfolio that we shall want to buy more shares when the next bear market inevitably occurs? If such considerations would leave us with a much reduced portfolio, well and good. Extra cash reserves from the sale in this way of several assets can be put to excellent use once "Mr. Market," as Benjamin Graham called it, has offered us up a bounty of fresh bargains from which to choose, some of which may well be as enriching as Ford turned out to have been if bought in 2009. When he does, it will again be time to "back up the truck" and load it with terrific investment deals. The rewards of a carefully selected and concentrated collection of worthwhile equities, followed closely and with patience, may then become evident.

I have been just as prone as the next person to adding too many assets to our portfolio, so this is a good occasion for me to whittle them down to a feasible few. At the table are these plus a handful more in which I currently have an interest for a well focused assemblage of stocks, once each is available at a compelling share price. As Warren Buffett found with Coca Cola (KO) in the 1970s and my mom did with Ford (F) in 2009, the next market plummet will no doubt create new opportunities. Several might turn out to be better than those cited in the table. Till then, this winnowed field appears to one amateur to have nice potential.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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