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Atna Resources, Coastal Energy and the 80-20 rule

I do not know if an 80-20 rule has ever been expressly stated for a portfolio.  However I do feel that such a rule exists.   Anecdotally, I am pretty sure my portfolio follows an 80-20 rule of sorts.  20% of the stocks I own are responsible for 80% of the gains.  Or thereabouts anyways.

If you take a look at the gains in my current online portfolio you will notice the following:

Atna and Coastal make up a massive amount of my current gains.

Albeit this is far from scientific but it is not the first time that I have noticed that I make all my outperformance from a couple of stocks.  In 2010, I’m pretty sure that most of my gains were due to Tembec, Mercer and Avion Gold, all of which tripled or better.  In 2009, it was Western Canadian Coal, Grande Cache Coal Mirasol Resources and Teck Resources (call options), all of which rather insanely increased some 5x to 10x during the year.  2007 and the first half of 2008 was all Potash and Agrium (in the second half of 2008 nothing went up but puts and the dollar).

A couple of points come to mind:

1. Do more of what’s working

First of all, you have to know when you’ve got a winner and when you have a winner you have to add to it.  I have done this of late with Atna.  I bought more Atna this week at $1.30 after having bought more at $1.15 after having bought more at $1 after having bought more at 90 cents.  I have bought it all the way up.  I did the same thing with Coastal (though that acccumulation was unfortunately interrupted by the European fiasco) during the first half of last year, as it ran from $4 to $10.

Of course the obvious question is: Why not just buy more of the position at the start?  It’s a great idea if you know the winners in advance.  Unfortunately you don’t.  At least I don’t.

I come up with lots of ideas.  Some turn out to be really good ideas.  Some turn out to be so-so.  I’ve gotten better at it over the years, so less turn out to be full-on stinkers.  Yet I still get a majority of so-so ideas that do nothing, and a couple winners that go to the moon.  And I generally have very little idea at the beginning which one an idea is going to be.

Take for example PHH right now.  This one feels to me like it could be the next big winner.  It’s worked out so far.  I have been adding some on the way up. But do I know whether the stock is going to be $25 or $12 6 months from now? Nope.  It could go either way.  Nevertheless when it hits $16 I will add more.  And when it hits $18 I will add more again.  If then, it gets to $25 it will be a big winner and I will be talking about PHH like I am talking about Atna and Coastal.  On the other hand, if PHH goes back to $12, I will likely carry a much reduced position in the stock, if I am not out entirely.

2. Don’t give stock tips

This leads me to my second point.  Giving advice on an individual stock, such sharing a stock pick with a friend or relative, or putting the name up on an investment board, is dangerous when taken out of the context of the portfolio as a whole.  My portfolio has had between 12 and 20 stocks in it over the last 8 months.  Unless I know which two or three are going to be the big winners (I don’t) then trying to give someone a tip is a losers game.  There is an 80% chance (give or take a few percent) that I am going to give them a loser (or at least not the big winner)

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