A Few Good Eggs in One Basket
The Power of a Concentrated Portfolio of Common Stocks
by
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For as long as I can remember, an important tenet of prudent investing has been adequate portfolio diversification. A common interpretation has been that diversification requires having no more than a few percent of your total invested assets in one security. Many professional money managers believe there should be at least fifty to one hundred names in a portfolio. Indeed, many institutions have prescribed diversification parameters that cannot be ignored.
On the other hand, a number of highly successful investors have advocated concentrated portfolios for individuals as an alternative to the conventional wisdom of broad diversification. For example, Peter Lynch, of the Fidelity organization and past portfolio manager of the Magellan Fund, is an advocate of investing in a handful of securities. Likewise, Warren Buffett believes that concentration in the right companies can be a more prudent and rewarding course of action than broad diversification. Philip Fisher, a longtime advocate of growth-stock investing, believed a portfolio should consist of between five and ten names. It’s also interesting to note that Benjamin Graham in his seminal 1949 book, The Intelligent Investor, cautioned against excessive investing and indicated that, even for the defensive investor, the number of issues in a portfolio could be as few as ten.
My own belief is that, for individual investors, concentrating one’s holdings in ten names or fewer, assuming each company has different investment characteristics, represents a valid and potentially productive practice.
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About the Book
In a stock market environment dominated by professional investors, A Few Good Eggs in One Basket offers a plain-talk approach to profitability by selecting and managing an investment portfolio of common stocks for an individual.
Author Richard L. Gunderson, who has been an investor for more than forty years, outlines an enduring framework that improves the odds for the individual investor to exceed the performance of the market over the long term by buying good companies at bargain prices. He outlines what constitutes a “good” company and how to determine when a price meets the test of being a “bargain.” A Few Good Eggs in One Basket also helps individual investors by discussing
- what to look for;
- where to look;
- when to buy;
- when to sell; and
- how many stocks to own.
A Few Good Eggs in One Basket presents a prescription designed to take advantage of opportunities created by market overreaction to bad news and disappointing results. Gunderson believes there are always bargains at any time and in any market. The challenge is to consistently apply a disciplined approach to identifying the unusual and favorable opportunities and concentrating a portfolio on those stocks representing the best combination of overall quality and intrinsic value.
About the Author
Richard L. Gunderson, CFA, is the retired CEO of a Fortune 500 Company and is a private investor. He earned a bachelor’s degree from South Dakota State University and an MBA in finance from the Kellogg School of Management at Northwestern University. Gunderson lives in Scottsdale, Arizona, with his wife, Barbara.