Ask the Fool Run Rate, Run

Q:

What's a "run rate"?

- G.L., Jacksonville, Fla.

A:

Imagine that you are studying the financial statements of Librarian Supply Co. (ticker: SHHHH). It is growing rapidly from quarter to quarter. Perhaps, for some calculation, you need to estimate its current annual level of sales. You could add up the last four quarters' worth, but that would clearly understate sales, as each quarter's numbers have been rising.

You need a run rate. Take the most recent quarter's sales of $40 million (up from $35 million the quarter before and $31 million before that). Multiply that by four, and you will have the company's current run rate for sales: $160 million. This is not a forecast or a measure of past sales - it is a reflection of the current level of annual sales.

Q:

In general terms, what is the best number of stocks to own?

- F.T., Detroit

A:

There is no answer perfect for everyone. Ideally, your money should be concentrated on your best ideas - the companies you believe hold the most promise. If you think a certain 10 companies are likely to increase your wealth the most, why spread your limited funds over an additional 10 or 20 (or more) less-auspicious firms?

Spread yourself too thin, and it becomes hard to keep up with all your holdings, which you should aim to do at least every quarter. (Less often can be OK with some established, stable blue chips.) If you have 25 companies in your portfolio, that means 100 quarterly reports to read. Yikes.

Focusing your money on too few stocks is extra risky, though. You stand to gain or lose a lot. For most people, eight to 15 companies is a good total to shoot for.