Limit the Risk
If you
have been following my blog and advice you now have 5 stocks. Consolidated Edison Inc. (ED) or another
utility, Kraft Foods Inc. (KFT) or another food stock, Eaton Corp (ETN) or
another industrial stock, and U.S. Bancorp (USB) or some other financial (Bank)
stock of choice. Last pick was an oil or
gas my recommendation was Chevron Corp (CVX) but any oil sector stock would
do. Remember you can own any stock in
the sector not the one I recommend.
I know Jim Cramer recommends you own only 5 stocks and
research each one a hour a week. I saw a
graph like this in the Charles Schwab investor magazine “onInvesting”. This graph shows the number of stocks owned
on the vertical line is the risk and the horizontal line that runs parallel to
the x-axis is the number of stocks you own.
With one stock your risk is at the upper left almost off the chart. The more stocks you own the lower your risk. In essence you become a mutual fund.
My recommendation is make sure you own only good stocks watch
the company specific news and be willing to explain to someone why you own a
stock. If you can’t expain to a
disinterested third party the logic behind why you own a stock, then you must
sell that stock and buy a new stock in the same sector. You can make love to your wife, making love
to a stock is very unsatisifating and you can loose a lot of money money.
I recommend you own a good stock in every sector. Spend your 5 hours a week researching the
market. Remember half the movement of
your stock is the market. Flaten out
your risk curve, follow the market. In
the next post we will explore new purchases.
Your goal is to own one stock the best stock in every sector. Be your own Mutual Fund. By being your own Mutual Fund you can
outperform Mutual Funds because you can hold out of favor stocks with good
fundimentals and hold them long enough to make good returns. In effect you become your own Hedge Fund.
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