Key Principle No. 13

Know what you own – do not over-diversify.

Limit the size of your portfolio to 20 to 30 stocks so that you can really understand why you own each investment.

In the world of low transaction costs and constantly flashing lights, it is easy to suddenly find yourself nibbling at every new idea and suddenly waking up to find that you have a portfolio of more than 100 stocks. Do not allow this to happen.

When you look at the most popular value mutual funds, they often have over 100 names.  Why?  Because the funds are so large that if they held concentrated positions they would own more than 10% of a company. The filing requirements are a nightmare.  Liquidity problems are also a problem for institutional investors.

One of the biggest advantages of individual investors is they can hold 3-5% of their portfolios in each of their best ideas. Individuals do not have to over-diversify.

Our model portfolio will not have more than 25 different stocks.

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