Page 400 - How to Make Money in Stocks Trilogy

Money Management 275

investment. If you have $5,000 to $20,000 to invest, three stocks might be a
reasonable maximum. A $3,000 account could be confined to two equities.
Keep things manageable. The more stocks you own, the harder it is to keep
track of all of them. Even investors with portfolios of more than a million
dollars need not own more than six or seven well-selected securities. If
you’re uncomfortable and nervous with only six or seven, then own ten. But
owning 30 or 40 could be a problem. The big money is made by concentra-
tion, provided you use sound buy and sell rules along with realistic general
market rules. And there certainly is no rule that says that a 50-stock portfo-
lio can’t go down 50% or more.

How to Spread Your Purchases over Time
It’s possible to spread out your purchases over a period of time. This is an
interesting form of diversifying. When I accumulated a position in Amgen in
1990 and 1991, I bought on numerous days. I spread out the buying and
made add-on buys only when there was a significant gain on earlier buys. If
the market price was 20 points over my average cost and a new buy point
occurred off a proper base, I bought more, but I made sure not to run my
average cost up by buying more than a limited or moderate addition.
However, newcomers should be extremely careful in trying this more
risky, highly concentrated approach. You have to learn how to do it right,
and you positively have to sell or cut back if things don’t work as expected.
In a bull market, one way to maneuver your portfolio toward more con-
centrated positions is to follow up your initial buy and make one or two
smaller additional buys in stocks as soon as they have advanced 2% to 3%
above your initial buy. However, don’t allow yourself to keep chasing a stock
once it’s extended too far past a correct buy point. This will also spare you
the frustration of owning a stock that goes a lot higher but isn’t doing your
portfolio much good because you own fewer shares of it than you do of your
other, less-successful issues. At the same time, sell and eliminate stocks that
start to show losses before they become big losses.
Using this follow-up purchasing procedure should keep more of your
money in just a few of your best stock investments. No system is perfect, but
this one is more realistic than a haphazardly diversified portfolio and has a
better chance of achieving important results. Diversification is definitely
sound; just don’t overdo it. Always set a limit on how many stocks you will
own, and stick to your rules. Always keep your set of rules with you—in a
simple notebook, perhaps—when you’re investing. What? You say you’ve
been investing without any specific buy or sell rules? What results has that
produced for you over the last five or ten years?