Chris Mayer, chief investment strategist, Bonner Private Portfolio: 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 one comes from Murray Stahl at Horizon Kinetics. I bring it to your attention because when I read it in 1997, it “wowed” me such that I’ve never forgotten it.
Maybe it will have the same effect on you.
Imagine it is 1982 and you have a portfolio with equal dollar amounts in the following six stocks:
- General Public Utilities
- Pan American
- 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 go 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 so many do so poorly in the market.
In any case, the example shows you what a just couple of big winners can do to a focused portfolio.
This is the strategy we follow in my latest investment service, Chris Mayer’s Focus. It’s all about finding a few great businesses with huge growth potential – those that can return 100 times your money.