There are two questions that I’m often asked about equity investing that I really don’t like. The first is, “What’s the one stock I should buy right now?”
It’s not an unreasonable question, but it assumes that I (or any of the Cabot analysts) always have one sure thing up my sleeve, one stock that has a “Can’t Miss” label pinned to its collar. I wish it were true.
If there were ever a stock in which I had absolute confidence, one that I knew would go up in a big way, I’d be as tempted as anyone to put way too much money into it.
The sad fact is that every stock anyone ever buys is a bet, and the best you can do is get the odds in your favor as much as possible. Just as “There Ain’t No Such Thing As A Free Lunch” (the famous TANSTAAFL Principle), there also isn’t such a thing as a sure thing.
The second question is even trickier. It’s “How many shares of this stock should I buy?”
It’s not a fair question because the answer depends on how much investible income you control, your risk tolerance, the diversification of your portfolio, your age, marital status, employment and a host of other factors. That’s why I don’t give personal financial advice. I’m strictly a stock market guy. People study for years to learn how to answer that question, and then they’re called financial planners. If you hire one (and it’s an excellent idea), expect to end up with them knowing everything about you down to your shoe size.
As a simple stock picker, I have only one piece of advice when someone asks how many shares to buy. I tell them to stop thinking in terms of number of shares.
It used to be that making a buy of an even lot (usually 100 shares) would get you a significant break on your brokerage commission. These days, however, most discount or online brokers charge only by the transaction, so buying in round numbers doesn’t do you any good.
In fact, buying even-numbered lots of stocks with different prices just skews your risk profile. You may not be twice as confident about stock YYY as you are about ZZZ, but if YYY trades at $20 a share and ZZZ trades at $10 a share, buying the same number of each will give you twice as much risk exposure to the higher-priced stock. You need to stop thinking shares and start thinking capital.
The more prudent approach is to divide up the amount you want to invest in growth stocks (or value stocks or income stocks) into equal-dollar positions and then put that amount into each stock. So if you have $50,000 to invest in growth, and you want an aggressive portfolio, you should aim at having 10 positions of $5,000 each. This will give you enough diversification so a meltdown in one of your holdings won’t kill your results, while being concentrated enough that a big winner can give you a significant boost.
I agree that “How many shares should I buy” is not an easy question to answer. However this question wouldn’t even be asked if you hadn’t answered the first “What’s the one stock I should buy?”
Usually if someone feels the need to ask someone else what stock they should buy, it is in my experience this person shouldn’t be buying individual stocks at all, but index funds instead. How can one own a stock comfortably, when they own the stock on the reccomendation of someone else and not their own analysis? (sadly enough this is the case for a massive portion of retail investors)
Just my 2¢
Cheers.
Ethan