Diversified Bullish

Should You Hold 5 Stocks or 30?

The topic of how many stocks you should hold is ambiguous. An old investing adage is 'concentration builds wealth', but is that true? I'm not so sure. It depends on the skill + experience of the investor and their conviction to hold the assets.

As a retail investor with less experience, I keep a diversified portfolio of stocks and index funds. I'm holding around 50 stocks and funds. Diversification lowers your risk and exposure to any given individual position. However, I do realize that concentration yields benefits like intricately focusing on the companies your money is riding with. Investing is an art steeped in allocation. When conviction (and profits) are high, I think it's acceptable to keep a higher allocation of such securities.

Gains Happen in Bursts

Gains tend to happen quickly in a short time. This is a reason to hold onto those shares a little longer. That sudden unpredictable catalyst might be around the corner.

When a stock moves, it can happen after years of stagnant price action. Don't miss your gains by exiting at the wrong time. If earnings are heading the right direction, the gains will come.

A List of Financial Cliches and Terms

1. "soft landing": implies graceful economic transition
2. "pivot": implies the Fed will switch its interest rate policy
3. "bottom": implies a time where the market will irreversibly swing to the upside
4. "short squeeze": price goes up due to short sellers being forced to cover their positions
5. "place to hide out": reference to a stock as a shelter or place unaffected by market drawdowns
6. "growth stock": stock that reinvests dividends to grow rather than paying to investors
7. "dividend stock": stock thay pays dividends to investors
8. "dead money": momentum of a stock has stalled and not changing anytime soon
9. "rekt": getting decimated by a position's losses
10. "falling knife": stock price is falling fast and risky to catch
11. "due dilligence (DD)": researching a stock's prospects to generate money
12. "money on the sidelines": reference to how much cash is waiting to be deployed into stocks
13. "dry powder": refers to amount of investable cash you have
14. "FUD": fear, uncertainty and doubt raised by a stock's haters
15. "whales": big shareholders that move markets when they enter or exit a position
16. "stagflation": reference to a stagnant, inflation plagued economy
17. "priced in": the price is all knowing, common catch-all trope
18. "forward looking": the market is out in future events and pricing accordingly
19. "overvalued": insinuates the market price is wrong about a stock, opposite of oversold
20. "oversold": implies the stock price has swung to the downside and is primed to bounce back
21. "valuation multiples": comparison of current price vs. earnings + cash flows
22. "trading at a premium": implies the stock commands its lofty valuation against its earnings
23. "long term": 1-5,10 or > 30 years, depending on who you ask!

Humans in the Balance Sheet

Corporations value humans, until times get tough. Then they start to cut.

I thought they were less brutal, deploying strategies so feudal. Employees are just a line item to them.

What's good for the company? They'll land on their feet. They don't care about a human in the balance sheet.

The Recession is Bullshit

I can't shake the feeling that we are being toyed with by invisible forces. First, a disease is manufactured and propagated. Then, a response to the disease is conceived. It includes locking down society and subsidizing the people with printed money.

This is all a tidy narrative for companies to retrofit to their own needs. A cycle of boom and bust is synthesized in the name of the greater good. Employers now have a reason to fire their employees and raise prices of their widgets. Stocks suffer because it's going to be difficult. Everyone knows a recession is coming!

Fear mounts. Worries pile up. The Federal Bank must curb inflation. They need to raise interest rates on borrowing money to get this nasty inflation monster under control. Now it costs more money for people to take out a loan and buy houses. Companies don't give raises. Inflation of consumer staples eat into our salaries. "The recession is coming!", they said.

In summation, we have a (natural?) phenomena, seized by world governments to extend their power in the name of protecting the people. Stocks go down for now. That's ok as a long term investor. However, I can't get over the idea that is all humans, all the way down. Humans doing human things: scheming, reacting and seizing an opportunity to claim the sky is falling. All along, fat cats padding their own pockets at the expense of their fellow man!

Do you think a recession will happen? Is it already happening? Or is it only our reaction to the idea of it? I, for one, find it amusing how humans can be so sure they know what is coming and what has already happened. I'm a skeptic! This recession is bullshit.

A Time Far Away

Investing requires seeing beyond the all around us. We are emotional creatures who fly off the cuff so easily. It helps to imagine a time far away from our current trials and tribulations as a species. This hypothetical time when the whole world cooperated for the greater good of commerce, prosperity and freedom for every soul on this damn planet. That is the admittedly optimistic bull case to juxtapose to the current environment. How much could the world change in 5, 10 or 20 years? War is disgusting, but I guess it's our current state of affairs.

Check Your Expectations

I have enjoyed Josh Brown's perspective as the market thrashed the past few years. A CNBC regular with razor sharp takes, I think I heard him recently say something to the effect of "check your expectations".

I agree with many things Josh says, but especially with this sentiment. Stoics know that by checking our expectations, we can better regulate our perception of what is happening with our investments. Consider lowering your targets for ROI and just relaxing your expectations in general.

What Does Intrinsic Value Mean?

The goal of this post is to find a layman's idea of what a stock's "intrinsic value" means. Intrinsic value is often praised as a claim to why the market price of company should be higher. What does that mean?

Checking Investopedia, the top hit on Google, "There is no universal standard for calculating the intrinsic value of a company... Typically, investors try to use both qualitative and quantitative to measure the intrinsic value of a company, but investors should keep in mind that the result is still only an estimate." - Investopedia, https://www.investopedia.com/terms/i/intrinsicvalue.asp

The next hit, Corporate Finance Institute offers a "Net Present Value" based formula, along with net cash flow, interest rate, etc. So it seems that the mathematics of instrinsic value calculation are sound, but the weighting of possible future outcomes is where an an analyst is more of an artist. https://corporatefinanceinstitute.com/resources/knowledge/valuation/intrinsic-value-guide/

In essence, intrinsic value is a mathematical model an analyst creates by weighing projected outcomes. There is no standard for producing an intrinsic valuation of a company. I find this somewhat amusing, because before when I heard the term intrinsic valuation, I assumed there was more to it. Such as a formal methodology that is carried out. However, like all future prediction models, they are subjective and sound more like a guess to me. I will be sure to take these instrinsic value calculations with a grain of salt from now on.

Industry-Based Investing

When picking investments, I like the idea of selecting assets based on their industry or the rise of a specific technology. One can observe the world, watch trends come and go and consider adding them to your portfolio.

For example, I believe that solar technology is likely to be an important source of energy in the future. I am basing this thesis on an anecdotal conversation with an energy engineer, along with generally positive sentiment for the solar energy industry as of late. For these reasons, I am marginally invested and building a position in a solar company, Sunrun.

Electric vehicles are another industry that I believe will play a big part in the future of humanity, so I'm holding Tesla. It's been my best investment by far. I'm still holding because I believe that electric vehicles are going to be huge in the future. One can hold a company based on principle, provided the quarterly earnings reports are acceptable.

Sometimes your thesis will be wrong. You can't win 'em all. You also don't need to win them all. Pick a few winners and mix with index funds to round out your portfolio and the 80\20 rule will emerge. A few of your assets will perform better than the others and reap most of your gains.

I think that this industry-based line of thinking is a way to frame your investments that can make it easy to remember why you're holding it. One can certainly be wrong about our projections into the future, but these are the types of angles a keen investor seeks out.

Ramblings About Stock Prices, DCA and Cash Position

I have realized a common idea most probably do. Predicting short term price movements is like picking black correctly in roulette. However, if the price does go down, that can often be a good thing for opportunistic and long term thinking investors.

The knobs and levers that influence the stock market are many. Stocks popped in July 2022. After 6 months that pummeled portfolios, we saw a massive buying response. Savvy investors must see opportunities in this hellscape of shriveled securities. So are we in the clear? Have stocks been "derisked"?

Trick question, stocks always include risk. The idea that anyone is certain about the price movement of any stock is pure poppycock. Only time will tell how high or low a stock can go. If the business's balance sheet and business prospects are strong it's easier to hold on for the ride when the market heads down.

In the coming days and months, it's impossible to know what will happen. War, inflation, disease and a public infatuation with the idea of a recession means it's all probably already priced in. July supported this idea with buying coming back in style. Or maybe the overall downward 2022 trend will continue?

My portfolio is down 18% YTD, not far off the S&P 500 index which is down about 13% YTD. After the July run-up, I want to build a large cash position, while making monthly contributions to max out my retirement IRA. I'm also hoping catch further drawdowns when they happen or hold a little more cash than usual. I've been steadily dollar cost averaging into my stocks and index funds during the recent downturn and that will continue, regardless of where we go from here. My most recent buys were adding to my S&P 500 index fund and adding to a minor YETI stock position.

Being aggressively invested with a large portion of your net worth in stocks and index funds makes you realize the luxury and life comfort you gain from holding a little extra cash. I'm hearing the dollar is stonger than the Euro now. My two weeks in Europe in 2011 tell me how shocking that is considering its superiority at the time. I'm allocated at 4% cash right now, but 10% cash seems a desirable spot to be due to my personal circumstances. Then I'll be able to pick my spots, while making regular contributions and have a little extra cash to live my life and pay the bills, travel and maybe even have a mini-retirement!