1. Lesson 10 How Many Stocks Should You Own?
Investor Education Series
Lesson 10 How Many Stocks Should You Own?
The comments expressed here are based upon study and interpretation of available data as it relates to our historical models of the best-performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date, the officers, directors and/or shareholders of Investor’s Business Daily, Inc. or their affiliates own securities or buy or sell securities listed in the following pages, or those not mentioned.
© 2011 Investor’s Business Daily. All rights reserved.
Investor’s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor’s Business Daily, Inc.

2. Diversify or Concentrate?
How Many Stocks Should You Own? (slide 21)
Tips on Managing Your Portfolio (slide 22)

3. Diversify or Concentrate?
Diversification is definitely sound. Just don’t overdo it.

4. “ ” Many investors over-diversify.
The best results are usually achieved through concentration, by putting your eggs in a few baskets that you know well and watching them carefully.
- William J. O’Neil, IBD Chairman and Founder ”

5. Diversify for the right reasons.
Sound diversification:
Owning stocks in different industry groups Helps minimize your risk if bad news suddenly impacts all stocks in a particular industry (e.g., energy, housing, semiconductors, etc.)

6. Don’t diversify just to diversify.
Does owning a lot of stocks really protect your portfolio?
Or just dilute your results?

7. 3 Problems with Over-Diversification

8. “ ” Over-Diversification Dilutes Your Returns
Your biggest % gainers may not be your biggest positions.
Your objective should be to have one or two big winners rather than dozens of very small profits.
- William J. O’Neil, IBD Chairman and Founder “ ”

9. Over-Diversification Can Lead to Buying Some Stocks with Less Potential or Lower Quality
Will you really achieve superior results by buying inferior stocks?
Broad diversification is plainly and simply often a hedge for ignorance.
- William J. O’Neil, IBD Chairman and Founder “ ”

10. Over-Diversification Doesn’t Protect Your Portfolio
Owning a lot of stocks can actually make it harder to spot early warning signs and reduce risk.
The more stocks you own, the more you have to sell to really protect yourself.
Remember: When the overall market goes down, 3 of 4 stocks go down with it.

11. Which Portfolio is Easier to Manage in Down Market?
20-Stock Portfolio
5-Stock Portfolio
Stock
% of Portfolio 1 5% 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Stock
% of Portfolio 1
20% 2 3 4 5
You must sell 16 stocks to protect 80% of your portfolio.
Will you really sell quickly enough to minimize your risk?

12. Which Portfolio is Easier to Manage in Down Market?
20-Stock Portfolio
5-Stock Portfolio
Stock
% of Portfolio 1 5% 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Stock
% of Portfolio 1
20% 2 3 4 5
You only need to sell 4 stocks to protect 80% of your portfolio.
Owning fewer stocks allows you to act more quickly.

13. If you over-diversify, can you really…
Get to know the whole story behind each stock BEFORE you buy?
Does it have superior earnings growth and other CAN SLIM® traits?
What is driving that growth? What is unique about its products and services?
What are key trends in its industry? Who are main competitors?
Do top-performing funds own shares? Are funds getting into – or out of – the stock?
The more you know about your stock, the easier it is to manage it.

14. If you over-diversify, can you really…
Effectively track each stock’s price & volume action AFTER you buy?
Will you identify add-on buy points to increase your profits?
Will you spot early warning signs to lock in gains and cut short any losses?

15. OpenTable (OPEN) Daily Chart April 25, 2011 Warning Sign:
New high on low volume - Closed near bottom of day’s range
- Is there less demand at this price level?
Would you have spotted that if OpenTable was one of 20 stocks you owned?

16. Would you be checking this chart daily if you owned many more stocks?
OpenTable (OPEN)
Daily Chart
April 26, 2011
Warning Sign:
Big drop on large increase in volume - Again closed near bottom of day’s range
Would you be checking this chart daily if you owned many more stocks?

17. There’s no substitute for watching each stock you own closely.
OpenTable (OPEN)
Daily Chart
May 3, 2011
Warning Sign:
Heavy & rising volume on 2 big down days
There’s no substitute for watching each stock you own closely.

18. BEFORE gap down, you saw warning signs by checking the chart daily.
OpenTable (OPEN)
Daily Chart
May 4, 2011
Warning Sign:
Gap closes below 50-day moving average line on heaviest volume in months - Often signals change in direction
50-day moving average line (price)
BEFORE gap down, you saw warning signs by checking the chart daily.

19. 39% decline in less than 2 months
OpenTable (OPEN)
Daily Chart
June 20, 2011
39% decline in less than 2 months
You could have sold on this day if you were watching closely for warning signs.

20. Bottom line: Decide if you will… Diversify Concentrate
Own a lot of stocks to, in theory, “spread risk” and “balance” your portfolio.
Concentrate
Buy smaller number of top-quality growth stocks and watch them closely. OR

21. How Many Stocks Should You Own?
Portfolio Size
Suggested Number of Stocks
Under $20,000
2 - 3 Stocks
$20,000 - $200,000
4 - 5 Stocks
$200,000 - $1 million
5 - 6 Stocks
$1 million - $5 million
6 - 8 Stocks
Over $5 million
7 - 8 Stocks
It Pays to Be Picky!
Limiting the number of stocks you own forces you to carefully choose each stock. That focus on superior stocks leads to superior results.

22. Tips on Managing Your Portfolio

23. The first thing you need to do is decide the maximum number of stocks you’ll own, and stick to it.
Question: What if I already own the maximum, but want to buy another top-quality stock?
Answer: Sell your worst-performing stock to make room for the new one.
Never ignore your limit and start adding more stocks.
Don’t sell your top performers and hold on to your laggards or losers! That’s a classic – and costly – mistake.

24. Target position needs to be same for each stock.
Decide the target position you’ll hold in each stock.
Scenario:
Portfolio Size: $80,000
Maximum # of stocks: 4
Target position for each stock: $20,000
Target position needs to be same for each stock.
Eventual position may change as you move more money into your strongest stocks. (see slide 26)

25. Establish position gradually, and start with same dollar amount for every initial buy.
# of shares doesn’t matter. Focus on dollar amount.

26. Why is it important to invest the same dollar amount for each initial buy?
You don’t know which stocks will become your big winners.
You do want your biggest winners to be your biggest positions.
By starting with the same dollar amount:
You’ll have a worthwhile position you can build on if the stock rises.  If you don’t establish a strong position near the ideal buy point, you may not get another chance on a stock that surges and becomes a big winner.  You don’t make big money by having a huge % gain in a tiny $ position!
Easier to do an “apples-to-apples” comparison to determine your leaders and laggards.  Helps focus on what really matters: $ profit amount, instead of % gain.

27. Gradual approach minimizes your risk if breakout fails
Scenario:
Portfolio Size: $80,000
Maximum # of stocks: 4
Target position for each stock: $20,000
1st Buy = $10,000 (50% of target $20,000 position)
2nd Buy = $6,000 (30% - 35%)  2nd buy made when stock is up 2% - 2.5% above ideal buy point
Final Buy = $4,000 (15% - 20%)  3rd buy made when stock is up another 2% - 2.5% above ideal buy point
Gradual approach minimizes your risk if breakout fails

28. Apple (AAPL) Daily Chart 3/12/10
Ideal Buy Point =
(10 cents above left-side peak in base)
Buying Range = –
(Up to 5% above ideal buy point)

29. You’re minimizing risk by only adding shares if the breakout works.
Apple (AAPL) Daily Chart 3/12/10
Buy #2
Buy #1
Buy #3
3/5/10 Buy #1:
3/8/10 Buy #2: $6,000 @
3/9/10 Buy #3: $4,000 @
You’re minimizing risk by only adding shares if the breakout works.

30. Decide maximum % of your portfolio you’ll have in any one stock.
Maximum % depends on your risk tolerance
Example maximum: 20% - 30%
Come up with a % you are comfortable with and won’t exceed
Adding to Your Winners
To maximize profits, move money from weaker performers into your winning stocks if you have a sound new buy point.
Don’t “chase” winning stocks. Only buy at correct buy points.
Don’t exceed maximum % of your portfolio you set for any one stock.
Buy fewer shares with each additional buy to avoid running up your average cost per share.
Be aware of what % of your portfolio is in the same industry.

31. Summary of Lessons Learned
Diversification is sound, but don’t overdo it.
Owning a lot of stocks doesn’t really protect your portfolio, but can dilute your results.
 The more stocks you own, the more you must sell to protect yourself in a down market.
Best to own a few carefully selected stocks and watch them closely.
Goal is to have one or two big winners, rather than dozens of small profits.
Tips on managing your portfolio:
 Decide the maximum # of stocks you’ll own and stick to it.
 Establish your positions gradually, and always start with same $ amount for initial buys.
 Decide the maximum % of your portfolio you’ll have in any one stock.

32. Where to Learn More About Portfolio Management
NEW! How to Make Money in Stocks Complete Investing System
 Includes How to Make Money in Stocks, Action Plan DVD, one month eIBD subscription. Plus, a free Level I seminar in city of your choice.
See Chapter 12: Should You Diversify…
Free Online Courses: “Managing Your Portfolio” (See “Education” tab on Investors.com.)
Investor’s Corner: Daily investing lessons. (See “Education” tab on Investors.com)
IBD Workshops: Beginning to advanced workshops on chart-reading, buy & sell rules, portfolio management and more. (See
Learn how to spot buy and sell signals with the Market Wrap and Daily Stock Analysis videos.  See “IBD TV” tab on Investors.com

33. Coming Next Month…
Lesson 11: Getting it Right – How to Conduct a Profitable Post Analysis
You’ll learn:
aWhy even the best investors continually learn from their mistakes – and successes
aHow to keep records of all your buys and sells to make reviews easier and more effective
aHow fixing just one or two bad habits can significantly improve your returns year after year
…and more!
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34. © 2011 Investor’s Business Daily. All rights reserved.
The comments expressed here are based upon study and interpretation of available data as it relates to our historical models of the best-performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date, the officers, directors and/or shareholders of Investor’s Business Daily, Inc. or their affiliates own securities or buy or sell securities listed in the following pages, or those not mentioned.
© 2011 Investor’s Business Daily. All rights reserved.
Investor’s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor’s Business Daily, Inc.