Corona Del Mar, CA

Howdy Friend!

Every Tuesday at 11AM, I host a group call for members of The Boss A.I.

One of the members had a great question: How many stocks should we trade?

Is there a rule of thumb?

Yes, there is definitely a rule to get started, and it depends on how many stocks are on your watch list.

But first, we have to start with Price's Rule (which is continuously attacked because it's highly suggestive that socialism can never work).

Basically, half of the output of a group of people will be performed by the square root of the number of folks in that group.

Here's an old school example: You have 16 people going door to door selling vacuum cleaners.

Four people will sell about half the vacuums (the square root of 16 = 4).

By the way, I used this example because I used my Kirby vacuum cleaner from 1995 the other day...works like a champ. Meanwhile, my refrigerator is only 10 years old and needs repair today.

Let's continue...

So basically 25% of your sales team makes half the sales.

OK, that's interesting. You probably noticed the same thing in the groups and even team sports you've been in.

Here's where it gets weird...as the size of the population increases, the number of people responsible for half the output shrinks dramatically.

So if your sales team is 100 people, only 10 people (10%) sell half those Kirby vacuums. At 10,000 half your output is from 100 people (1%).

I know that sounds bizarre, but look at Tiger Woods dominating golf awhile back...or Steven King selling tons more books than millions of authors.

// Quick aside: The whole world would be 87,177 people create half the output...which is insane, but worthy of studying. //

Anyhoo...

If you're selecting from the NASDAQ 100, a good starting point for the maximum number of stocks to hold would be 10 (square root of 100 = 10).

You get diminishing returns if you start going above the square root of the number of stocks .

Another example: The Russell 2000 stock index, which has close to 2000 small cap stocks. The square root of 2000 = 44.

Having a huge pool of companies to pick from doesn't really help you as much as you'd intuitively think.

At the end of the day, we don't put blind faith into this equation...we test!

Let's use the DB Transactions 2.0 strategy (built by A.I and responsible for the Forecast Friday picks). It's currently sorting through 211 stocks.

• Stats with 5 stocks max: 57% annual growth rate, but 50% max drawdown.
• Stats with 10 stocks max: 53% annual growth rate, 42% max drawdown.
• Stats with 15 stocks max: 47% annual growth rate, 38% max drawdown.
• Stats with 25 stocks max: 36% annual growth rate, 38% max drawdown.

The square root of 211 = 14.5

A small max number of stocks juices up the annual growth rate, but the draw down is too big for me.

At 25 stocks, you see the law of diminishing resturn kick in as your CAGR drops 11% and max drawdown stays the same.

I was told this was the nerdiest answer ever to this question, but those armed with the best information win.

P.S. Want to watch me build profitable trading strategies from scratch with just a couple clicks?

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I promise it'll be better than the Mayweather vs Paul Logan fight!

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Step 5: Additional Resources

The Relaxed Investor (The simple strategy proven to work since 1926. Downloaded by over 200,000 readers)

The Ghost of Bernie Madoff is Not Yet Dead (Is your broker on the naughty list? Many traders have no idea they're being sold out)

The Ultimate Crash Detector (The strange weekly report that helps predict crashes. LIVE trading signals since 2006)

Portfolio Boss User Guide (Our flagship strategy building platform User Guide. See what it can do to help you on you quest for F U money)

Trading With Other People's Money - Coming Soon!

Bit-coin for Busy People (How to get started with Bit-coin in under an hour without the complicated new exchanges, high fees, and complicated wallets)

Disclaimer: The results listed herein are based on hypothetical trades. Plainly speaking, these trades were not actually executed. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under (or over) compensated for the impact, if any, of certain market factors such as lack of liquidity. You may have done better or worse than the results portrayed.