The incredible power of a focused portfolio

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:

  • Chrysler
  • 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. You can get all the details right here.

Editor’s note: Chris Mayer’s Focus is all about building a focused portfolio of smaller companies that—while more volatile—have the potential to become “the next Apple.” To find out more, go here. But don’t hesitate. This presentation—and Chris’ special offer—ends in a few short days.

Posted in Palm Beach Daily
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