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The Incredible Power of a Focused Portfolio

By Chris Mayer, editor, Chris Mayer's Focus
Tuesday, February 7, 2017

The investment strategy I recommend to my readers, and the one I personally follow, is controversial.
 
It's about focusing on a small number of stocks – only your best ideas – and letting them ride.
 
Most "experts" tell investors to hedge their risk by owning 20 or more stocks. But the effects of a small-portfolio approach can be mind-boggling.
 
Let me walk you through one example...
 
This example comes from Murray Stahl, CEO of investment firm Horizon Kinetics. I bring it to your attention because when I read it in 1997, it "wowed" me so much that I've never forgotten it.
 
Maybe it will have the same effect on you.
 
Imagine the year is 1982, and you have a portfolio with equal dollar amounts in the following six stocks:
 
Chrysler
General Public Utilities
Pan American World Airways
Massey Ferguson
International Harvester
White Motor

How do you think you would do if we fast-forwarded about 10 years later – to the end of 1993?
 
Before you answer, let me give you a clue: Both Pan American and White Motor went to zero.
 
Put another way, one-third of your portfolio would become worthless – a loss of 100%.
 
And here's another clue: The S&P 500 would return 17% annually from 1982 to 1993.
 
Given those two clues, do you think that six-stock portfolio beat the S&P 500?
 
The surprising answer is... yes.
 
That six-stock portfolio would return about 19% annualized. And the source of those returns comes almost entirely from just two stocks: Chrysler (which returned 32% annualized) and General Public Utilities (28%).
 
These two stocks would come to represent 93% of the portfolio.
 
Stahl writes: "The power of compounding is so remarkable that these two more than compensate for disastrous selections."
 
It's an extreme example. And maybe it's impractical to expect anybody to stick with a six-stock portfolio untouched for 10 years. Then again, maybe that's why many investors do so poorly in the market.
 
In any case, the example shows you what just a couple of big winners can do to a focused portfolio.
 
Sincerely,
 
Chris Mayer




Further Reading:

The stock market may be expensive today... but you can still find good values. And if you're looking for the biggest winners – the stocks that return 100-to-1 – these "100 baggers" have key features in common. Learn how to find them in Chris' essay: Three Clues to Finding the Next 100-Bagger.
 
"By buying 'the market,' you're guaranteed an average return – no more, no less," writes Chris. "But if you're going to try to escape from the average, you can't do what everyone else is doing." Learn how to approach your individual investments without getting distracted by market moves right here: Why I Don't Focus on the Overall Market.

Market Notes


THE BULL MARKET IN SPARKLING WATER

Today's chart showcases a growing sparkling-water business...
 
SodaStream (SODA) is the world leader in home carbonation systems. The company sells 11 different models of "do it yourself" soda machines, with more than 100 "better-for-you flavors" in 60,000 stores worldwide.
 
At the end of 2015, the company shifted its focus from selling home carbonation systems to selling gourmet sparkling-water kits. It appears the transition is paying off... In November, the company reported sales and profits that beat analysts' expectations. Sales of its sparkling-water makers jumped 23% to the highest quarterly figure in nearly two years. Not only that, but SodaStream's systems produced more sparkling water than any other brand.
 
As you can see, SodaStream's shares are up substantially. The stock soared nearly 240% in the last year and just hit a new 52-week high. This rebranding campaign is working perfectly...
 

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