Recently I talked about the difference between value investing and growth investing, and why it’s important to invest in a way that’s consistent with your investing personality.
So, let’s suppose that you have done your introspection and you’ve figured out that you’re a growth investor (a good choice, at least from my point of view!). This means that you’re prepared to buy stocks that are in strong uptrends and sell them quickly when they show signs of deteriorating performance.
The Internet will be happy to introduce you to any one of a half dozen online brokers, all of whom have made it quite easy to set up a trading account. Fill in the blanks. Send in the check. You’re good to go.
And now you’ve done your homework and you’re ready to make your first stock purchase.
You’d think that the next question would be, “How many shares of this stock should I buy?”
Wrong question.
You have a tiny bit more homework to do before you actually hit the “BUY” button.
The real question is “How aggressive a growth investor do I want to be?”
(If you were a value investor, you would want to buy lots and lots of different stocks. Value investors seek to minimize risk and one way to control risk is to spread it out over a large number of investments. That way, any holding that tanks won’t drag down your results too much.)
As a growth investor, the most aggressive stance you could take would be to take your entire allocation and buy one stock. That way, an 10% appreciation of that one issue would raise the value of your portfolio by 10%.
Of course, the converse is also true.
We consider the Cabot Market Letter’s Model Portfolio to be fully invested when it has 12 holdings. That’s a moderately aggressive stance.
The Cabot China & Emerging Markets Report has a portfolio that’s considered to be maxed out when it has 10 stocks. That’s even more aggressive than the Cabot Market Letter.
With 10 stocks, if one of our holdings goes up 10%, the value of our portfolio goes up 1%.
So, if you want to be an aggressive growth investor, you should (mentally) divide the value of your growth allocation into ten equal-dollar amounts, and use that as your full position amount. Then you let the price of the stock decide how many shares you buy.
If you have $10,000 allocated to aggressive growth and you want to add a stock that’s trading at 10, you will wind up with 100 shares worth $1,000. If you want to grab some Intuitive Surgical (ISRG), which is trading at around 327 as I write this, you will purchase three shares.
Don’t let the old idea of 100 shares being a full position fool you. That’s a holdover from the days when you had a real human broker who did the buying for you. He would get a small price break for buying a round-numbered lot, which he might have passed along to you.
But the big electronic online houses don’t give a rip how many shares you buy.
So there’s your answer to the question “How many shares should I buy?”