Stocks: How Many Should You Own

Source:

"three categories or strategies for investment. . ."

An investor called us up to tell us that he had just purchased another dozen or so gold stocks, and then questioned us about each one. Our friend knew very little about his purchases, which caused us some concern. As the conversation developed we defined three categories or strategies for investment as follows:

Strategy one is his approach of using a scatter gun and buying stocks with little knowledge of them in the hope that they will all be successful and some may turn out to be hugely successful by becoming ten baggers. A ten bagger is great dinner party topic where one can wax eloquently about the stroke of genius that brought about this success. However, it will also prompt the question of just how many of the stocks in your portfolio actually underperformed.

Strategy two is to be selective about what you purchase and try to learn everything there is to know about your stable of gold explorers and producers and keep track of them. Watch for changes in management, the political situation wherein they operate, any acquisitions they make, changes to the incentives scheme for management, etc.

Strategy three is to take the sniper's approach to investment and dedicate yourself to just one stock. This stock you will learn to understand inside out—its history, how it reacts in any given situation, etc. You will still need to understand the precious metals market sector and the economic and political influences that affect your chosen star performer.

The latter strategy will be put down by many as having all your eggs in one basket and, therefore, carries with it an enormous downside risk; but it does appeal to investors who don't have time to spread their energies over a wide range of stocks.

We could also mix and match some of the above with the precious metals element of a portfolio being 40% spread over half a dozen companies, 40% in your star performer and 20% in cash for future opportunities.

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