As a recreational poker player, I find it exciting to occasionally throw all of my chips on the table and go “all-in.” Sometimes this can pay off, especially during the rare occasion of having pocket aces.
However, this is a concept that I do not recommend with investing, regardless of how much you believe in a company. A disciplined, long-term approach is vital in developing a diverse, well-managed portfolio that will handily beat the market.
I believe that it’s important for each investor to limit their investment in any particular company to a specified level and to make it a personal rule to not exceed this level. My personal rule is 5%, but this will vary from investor to investor depending on their investing experience, investing style, risk tolerance, and current allocation situation.
It is very tempting to break this rule with some companies such as Apple Inc. (NASDAQ:AAPL). Apple Inc. (NASDAQ:AAPL) is a perfect example of how capping the percentage of any one holding could save investors a large amount of heartache.
In a relatively short time, Apple Inc. (NASDAQ:AAPL) has fallen 40% to around $430 per share from its all time high of $700 reached during the fall of 2012. When Apple Inc. (NASDAQ:AAPL) was at $700, everyone loved the company and some analysts had targets of more than $1,000 per share. If an investor would have gone “all-in” at that point by risking a majority or all of their portfolio to buy Apple Inc. (NASDAQ:AAPL) at $700, their stress level and amount of sleep would more than likely have been affected in a very bad way.
Apple Inc. (NASDAQ:AAPL) has a current P/E of 10 and after the recent 15% dividend increase, yields nearly 3%. With a payout ratio of 30%, these dividend increases should continue well into the future.
If an investor would have gone “all-in” two years ago when Netflix, Inc. (NASDAQ:NFLX) was trading near $300 per share, they would have experienced a gut-wrenching downturn to the $50’s. However, if an investor would have gone “all-in” when the stock was in the $50’s during the spring of 2012, they would be more than likely celebrating immensely at a remote beach sipping on an adult beverage of their choice. However, It’s important to note that this would have been a major gamble.
Netflix, Inc. (NASDAQ:NFLX)’s 2012 earnings were down significantly from 2011 earnings due to inappropriately-timed price increases in addition to streaming launches in international markets. The investments to expand its international streaming capabilities should pay off big time in future years. Netflix, Inc. (NASDAQ:NFLX) currently has an impressive 36 million (and growing) streaming customers.