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Don't Own Too Many Names

 

 

Rule 11

In my years as a hedge fund manager, I spent three hours every day analyzing the mistakes of the day before.

That was my major task, one that I completed before anyone else came into the office, generally between 4 a.m. and 7 a.m. I would analyze every losing trade — you don't need to analyze the winners, they take care of themselves — and try to figure out how I could have made more money or lost less money.

I was maniacal about it.

And after a couple of years of this, I realized that good performance could be directly linked to having fewer positions.

I never will buy a stock without first taking one off. That's a great discipline and one you should adopt, pronto. All the bad money managers I know have hundreds of positions. All the good ones have a few that they know inside out and like on the way down. That's why I say:

 

Don't own too many stocks.

 

I know it can be constraining. For instance, I might like several stocks in the chemicals group, say, DuPont (DD - news), Dow Chemical (DOW - news) and Eastman Chemical (EMN - news). But my discipline leaves room for only one, so I would own the one that I thought was the cheapest and the best.

When I lost the most money as a hedge fund manager, by the way, my "sheets," my position sheets, were as thick as a brick. When I made the most money, my sheets were, well, one sheet of paper, double-spaced. And I ran hundreds of millions of dollars.

Please remember that whether you are a pro or an amateur, you can always have too many positions.