Collection: Mohnish Pabrai - #139 'How Many Stocks You Should Own In Your Portfolio'



[Transcript]

AUDIENCE MEMBER 00:00

Hi, so my name is Francisco and I actually had a question regarding diversification. So I know your strategy is more kind like equity long value investing but within like an ever-changing world where industry trend might change or competitive advantages might disappear. What’s your opinion on diversification like how many stocks is enough for your portfolio, for example?


MOHNISH PABRAI 00:27

Yeah, I mean, I think it depends on your degree of conviction. I mean, I would say very few of us can get to Munger’s degree of conviction where two stocks are 94%.


But you know, Charlie Munger says that if you owned in a small town in America, the McDonald’s franchise and the Ford dealerships and the best office building in town and the best apartment building in town. Let’s say those are the four assets you had and you could own fractions in them, so you will not be rich enough to own all four completely, but you could own 5% of McDonald’s or 7% of Ford Dealer something like that.


His perspective was the portfolio which had those four assets in a place like let’s say Peoria, Illinois middle of nowhere would be enough to make you quite wealthy over lifetime. And so if you – if some person looked at that portfolio, they would say there’s extreme geographic risk because everything is in one town, right.


But you know, if you meet any entrepreneur in Irvine, let’s say some Chinese couple running a small Chinese restaurant, nearly all of their net worth is in one asset not even four assets in one town, right? And so that’s probably even more risky than what Munger suggested Peoria, etc.


So I think the answer on how many stocks or how many positions is a function of how well you know the companies and how durable those moats are and you are right that over time almost all moats erode, you know, almost all companies lose their competitive advantage.


I mean the Ford dealership, I don’t know what that looks like in 20 years, you know, maybe 10 years it’s okay, but 20-25 years it maybe fine, I can’t tell. McDonald’s might still be there, but we again we don’t know, you know, food is an area where if you get to things like what happened with Chipotle you can hit some brick walls.


So I would say for the mere mortals like us, not the Munger of the world, I think if you got to probably something like 10 stocks that you understood really well in a few different industries. That’s plenty.


I don’t think you should get to 50 stocks in a portfolio, I think that’s not going to help you. But something like, you know, 10, 15 or 8 or something is probably a good number.


(Source: https://youtu.be/bLjoL5zhBxA)

 

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