2007 October « Enterprising Investor Forum

How Many Stocks? Wednesday, October 3, 2007

Posted by ei-forum in Investing.
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Investors often wonder how many stocks they should own and despite the fact that, we think, most people understand that just owning 1 or 2 stocks can be quite risky, we think that most investors would be surprised by the small number of holdings that are needed to provide significant diversification.

Before going any further, we would just like to make a fairly obvious statement on how many stocks to own:

it pretty much depends on how much time you are willing to dedicate to keeping up with your portfolio

So, assuming that we all agree that it is wise to build up a diversified portfolio to balance the negative effects of a bad pick or a specific industry downturn, how many stocks are needed to avoid what is called ‘nonmarket risk’? Well, we think readers would be surprise to see the following figures:

2 stocks would eliminate 46% of nonmarket risk of just owning 1 stock
4 stocks would eliminate 72%
8 stocks would take the figure to 81%
16 stocks would free you from 93% of the risk
32 stocks would eliminate 96%
and 500 stocks would eliminate 99%

What does the above mean for the average investor? It highlights the fact that if you focus on selecting and owning a diversified portfolio of between 8 and 16 stocks you can rest assured that you are more than adequately protected against nonmarket risk.

Investing in Blue Gold Tuesday, October 2, 2007

Posted by ei-forum in US Traded Stocks.
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Water demand keeps on increasing but what about supply? Despite the vast amounts of water present on the globe, fresh water only represent 3% of the total volume an and yet less than 1% of the planet’s water is drinkable. According to the UN, 20% of the world’s population does not have access to drinkable water and this figure keeps on rising. How should investors play this sector?

Water stock prices have been climbing steadily in the past years but recent market turmoil may have led to some interesting opportunities. Some investors will prefer to look for conglomerates that are active in this sector such as General Electric (GE) – which is a great compnay but is also trading near a 52-Week high. However, we like to look at some of the more specialized players.

The companies that are currently on our watch list are:

Aqua America (WTR) – largest water utility company in the US
Veolia Environment (VE) – probably the best global water play

Again, the share price has already risen but we feel that there is still enormous long-term potential on the sector and that these stocks are ideally placed to profit from this growth. Our readers know that we are uncomfortable with the way the market seems to only be noticing the ‘good’ news and that in the short-term we see a ‘forced’ wakeup call coming. We will be looking to use the latter scenario as a buying opportunity for stocks that interest us.

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