Put all your eggs in one basket...
In my recent market-related reading, I’ve found some commonalities that go back a few hundred years and felt compelled to put them in one place:
“The way to become rich is to put all your eggs in one basket and then watch that basket.” - Andrew Carnegie
“Remember too that it is dangerous to start spreading out all over the market. By this I mean, do not have an interest in too many stocks at one time. It is much easier to watch a few than many. I made that mistake years ago and it cost me money.” - Jesse Livermore
“I remember playing golf one afternoon with an old friend of my younger days. He asked me what I thought of the market. This was in June, 1929. "What have you got?" I countered. "Oh," he said, "I've got a flock-Radio, Simmons, Sears, Indian Refining, Standard of Jersey, Steel, Westinghouse." All told, he named seventeen in which he had a total of about 25,000 shares. There were hundreds like him in the country at that time. I shook my head. "Too many to watch," I told him. "You can't get in or out. You can't hope to watch that many even on the ticker. You'd have extraordinary difficulty in arriving at sound conclusions regarding them. You ought to trim down that list. Never be in more than four or five at a time. Four is plenty. So many stocks are confusing and interfere with your judgment. You can't make money that way.” - Arthur Cutten
“The more you diversify, the less you know about any one area. Many investors overdiversify. The best results are usually achieved through concentration, by putting your eggs in a few baskets that you know well and watching them very carefully. Did broad diversification protect your portfolio in the 2000 break or in 2008? The more stocks you own, the slower you may be to react and take selling action to raise sufficient cash when a serious bear market begins, because of a false sense of security. When major market tops occur, you should sell, get off margin if you use borrowed money, and raise at least some cash. Otherwise, you’ll give back most of your gains. The winning investor’s objective should be to have one or two big winners rather than dozens of very small profits. It’s much better to have a number of small losses and a few very big profits. Broad diversification is plainly and simply often a hedge for ignorance. Did all the banks from 1997 to 2007 that bought packages containing 5,000 widely diversified different real estate loans that had the implied backing of the government and were labeled triple A protect and grow their investments? Most people with $20,000 to $200,000 to invest should consider limiting themselves to four or five carefully chosen stocks they know and understand. Once you own five stocks and a tempting situation comes along that you want to buy, you should muster the discipline to sell your least attractive 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 concentration, 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 portfolio can’t go down 50% or more.” - Bill O’Neil
“When I’ve looked at all the investors of very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common. And it’s the exact opposite of what they teach in a business school. It’s they make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying. I don’t know whether you remember, Icahn a few years ago put $5B into Apple and I don’t think he was worth more than $10B when he did that. When I went in to tell Soros that I was going to short 100% of the fund in the British pound against the Deutschmark, he looked at me with great disdain because he thought the story was good enough that I should be doing 200%, because it was sort of a once-in-a-generation opportunity. So…they concentrate their holdings…this is very counterintuitive…in my thinking, [concentrating your bets] decreases your overall risk because where you tend to be in trouble is if you have 35 or 40 names and you stop paying attention to one. If you have a big massive position, it has your attention. My favorite quote of all time maybe is Mark Twain: “Put all your eggs in one basket and watch the basket carefully.” I tend to think that’s what great investors do.” – Stan Druckenmiller
See also my post on diversification in the Soros empire.
Just remember these guys also adhered to trading principles.
Food for thought.