No. of Recommendations: 14
So, I guess, I own in the high double-digits of different shares. So people ask what I don't simplify my life and just buy an ETF or two.
I totally support a broad portfolio, if there is a reason for it. A lot of folks say that a diversified portfolio will necessarily come to resemble the return of an index, approaching its return asymptotically with the number of positions. But that's true only if the stocks are chosen at random, not if they are chosen in any other way. Presumably yours are not chosen at random.
Fun with numbers: Does a 75 stock portfolio closely match the S&P 500? Many commentators would say yes.
Pick the most boring metric in the world, P/E ratio.
Of the ~1700 stocks in the Value Line report, buy the 75 with the lowest earnings yield. Hold two months and repeat. After trading costs, lagged the S&P 500 by -9.6%/year in the 39 years to end 2024.
Of the ~1700 stocks in the Value Line report, buy the 75 with the highest earnings yield. Hold two months and repeat. After trading costs, beat the S&P 500 by +1.7%/year in the 39 years to end 2024.
Difference: 11.2%/year.
Same test with top and bottom 75 by ROE instead of P/E, difference 7.5%/year. And so on.
A broad portfolio can diverge wildly, if the picks aren't random. If you hold lots of positions, don't feel bad about it!
Jim
