Diversification

[DesertCat]

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Well, think of it this way, if we are only buying one stock from our list of top stocks, our lock of the year or whatever we want to call it, shouldn't it outperform our own picks of top 10 or top 25 stocks?

We don't expect all of our picks to perform equally do we?

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No, of course not. But our pick of the year doesn't always outperform, sometimes we make mistakes. That's why my goal is five stocks, it's enough diversification to prevent one bad pick from killing me, without forcing me to buy a bunch of lower quality opportunities just for diversifications sake.

My memory tells me (for however accurate that is) that the returns from my #1 picks haven't been much higher than from my #2-#5 picks over time. In fact I can remember several that I thought were the greatest ideas ever that turned out to be lousy.

This thread is motivating me to prune some of the worst ideas out of my portfolio now. I have ten positions and some of them are "mistake refusals", stuff I bought that turned out to be mistakes, and I'm waiting for slightly better prices to unload so I can make a small profit and declare victory. This is very bad behavior (see the behaviorial investing thread) and I'm going to heal myself right now.

[AceHigh]

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My memory tells me (for however accurate that is) that the returns from my #1 picks haven't been much higher than from my #2-#5 picks over time. In fact I can remember several that I thought were the greatest ideas ever that turned out to be lousy.

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I think sometimes we are going to have 5 good picks and sometimes we are going to have 2 good picks. We should take all 5 when we have 5 good picks, but I'd rather go 100% on 1 good pick if that's all I have, than to pick 4 other mediocre stocks to just to fill out my portfolio.

Do you rank your picks? I have stocks I like more than others I buy, but I don't really rank them.

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This thread is motivating me to prune some of the worst ideas out of my portfolio now. I have ten positions and some of them are "mistake refusals", stuff I bought that turned out to be mistakes, and I'm waiting for slightly better prices to unload so I can make a small profit and declare victory. This is very bad behavior (see the behaviorial investing thread) and I'm going to heal myself right now.

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"Selling doesn't create a loss, it stops the loss from growing."

Leon Allen

[DesertCat]

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Do you rank your picks? I have stocks I like more than others I buy, but I don't really rank them.

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I do rank my ideas, by discount to estimated intrinsic value, and estimated return over a reasonable holding period. It's sometimes difficult to compare a good long term hold vs. a merger arb, since the holding periods are so different. But I almost always prefer the great long term investment to a great short term investment, not just because of the benefits of tax free compounding over years, and lower long term capital gains rates, but because it's also less work.

If I could find five great long term holds, I'd have little to do other than play poker all day...

[buffett]

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If I could find five great long term holds, I'd have little to do

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I always wonder what Glenn Greenberg does all day.

[DesertCat]

In thinking more about this thread I'm wondering if my advice was way too risk adverse for Degen.

I quit college before finishing to work at a software startup that was near bankruptcy for the first year. Fiver years later I quit the best paying job I ever had to co-found a software company with a friend. In the first case I didn't get rich, at least financially, but what I learned was priceless. In the second case we (after many years of wonderfully hard work) sold the company for enough to allow me to become a full time investor.

So I'm a big believer that the one of the best routes to riches (or at least comfortable laziness in my case) is starting a business. That's taking risk. Though I had little to risk in both cases. In the first I was broke. In the second, I knew I could get a good job if we failed, and was only investing sweat equity.

If you want to put a couple years of savings into a business you truly believe in, go for it. Do your research of course. And if it fails, you are only two years behind and probably learned something valuable.

But if you've built a big nest egg, that's a guarantee of a signficant and growing income stream for the rest of your life. If you protect it. Start a business if you want, but try not to put your entire life savings in it. Scrimp and get by until the business starts generating income.

My friend's failure is that he always viewed business as a roulette wheel, you take big risks for big rewards. That's great when you have little to lose. But once he got rich, he still wanted to be richer, and was too impatient to change his ways. He ended up putting it all down on red, and spun that wheel one time too many.

[lastsamurai]

At this point i would just ride your winner...make sure you use your stops...The last thing you want to do is to let your potential 10 bagger go....

[Peter666]

This strategy is correct for getting the greatest gains. Risk has MUCH more to do with knowledge than diversification.

Basically, get a handful of companies you like, get to know them extremely well, then buy them up when you see value. That's how to make big $. I did it with NFLX this year, and I am doing it with ADBL now and in the coming year. Stick to your convictions.

My other rule of thumb: if you can't reasonably beat Berkshire Hathaway's average performance within one year (20%) you should not have your money anywhere else but in BRK. If people are spending their working lives analyzing the markets to get below BRK gains, than it is a waste of a life.

[Peter666]

"the downside, you might wake-up one morning and find that much of your net worth has disappeared."

The likelihood of this happening with certain individual stocks are almost nil. You have a much greater chance getting hit by a bus on the way to the bank.

[edtost]

[ QUOTE ]
This strategy is correct for getting the greatest gains. Risk has MUCH more to do with knowledge than diversification.

Basically, get a handful of companies you like, get to know them extremely well, then buy them up when you see value. That's how to make big $. I did it with NFLX this year, and I am doing it with ADBL now and in the coming year. Stick to your convictions.

My other rule of thumb: if you can't reasonably beat Berkshire Hathaway's average performance within one year (20%) you should not have your money anywhere else but in BRK. If people are spending their working lives analyzing the markets to get below BRK gains, than it is a waste of a life.

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glad to see we have forum members with real risk-management systems in place.....