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Good Reasons Not to Diversify
03/27/2012 3:30 pm EST
A concentrated portfolio of no more than 12 highly performing stocks can generate the kind of super performance standards most traders dream of, says portfolio manager Bob Weissman.
Don’t diversify? We’re here with Bob Weissman, who is going to tell why not diversifying isn’t as contrary a thought as one might think.
Yeah, exactly. Most people are taught originally that diversification is your safeguard, your safety net into trading. I’ve been working with a methodology for over seven years now that holds the adage of don’t diversify, and it is the formula for success.
Now, that isn’t to say that you put all your money into one stock the day before their earnings report comes out; what we really mean is don’t overdiversify.
Okay, so more targeted trading.
Exactly. In fact, with a concentrated portfolio, you’ll be able to achieve the type of super performance results that Mark (Minervini) has been able to achieve throughout his career.
Mark is very comfortable having as little as only four stocks in his portfolio, and if you need a little bit more comfort, you can go up to eight or ten, but about 12 is more than sufficient to diversify your portfolio.
So over a dozen stocks and then you’re running the risk of diluting and increasing your risk of losing money?
Absolutely, because you’re not going to get enough bang for your buck when trades turn successful for you.
If you’re managing 20, 30, 40, 50 different names, just following those stocks and knowing everything you need to know about those stocks is a full-time job in itself, so by only having four names, for example, to be following, you’re going to be much more focused, you’re going to know everything you need to know about those names, and you’re going to be much more able to manage your portfolio just simply from a time and energy standpoint because you only have a few names to be following.
Say you make your money on a trade; is it then time to find another stock, or do you stay with the specific stocks that you’ve had in your corral? Or do you gradually expand your knowledge base and then look to various sectors and various particular stocks within those sectors when need be?
Well, I think you hit the nail on the head, as they say. We are swing traders, so we’re typically going to have a time frame of a few days to a few weeks, and we are looking for that quick, explosive move in stocks that we get in to. That’s the exact type of action we’re looking for, and if it’s not producing, we’ll be looking for other opportunities.
If, of course, it does produce, and it does hit for that type of return, then it’s already now done what we expected, so it’s time to move on, take our profit, and run to the next opportunity.
And how does that targeted strategy reveal itself in your results?
Well, excellent point. We are what’s known as “two-to-one” traders, and that’s making $2 for every $1 that we lose. Our batting average is roughly 50%, and so you’ve got to really know your math.
In fact, we track all of our results, and there is a mathematical formula that you can actually use to determine the optimal position sizing. Based on our results, it is best to have 25% of the portfolio in each trade, so that’s exactly what helps to identify how to optimally trade your account.
- Are You Using the “Trader’s Equation?”
- The #1 Priority Before Any Trade
- A “Ladder” Approach to Position Sizing
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