And there is a good reason for that…
While you might be right in your argument, which I have no interest or reason to dispute, I’d like to clarify that my point was not about making a bit more money but about protecting the portfolio: fragility vs. robustness. After all, this thread is about the dangers of conviction, not about getting more yield.
Denny Schlesinger
Most record in MY history. Shares a similar horror story.
http://discussion.fool.com/the-real-real-risks-of-margin-1225137…
Most recced in MF history. Shares a similar horror story.
http://discussion.fool.com/the-real-real-risks-of-margin-1225137…
Regarding diversity, with each stock you add to a portfolio you get diminishing diversification.
One should also be aware of Sector Concentration. Owning DDD and SSYS and XONE should not be treated the same as owning 3 stocks in different market sectors. Peter Lynch called that “Diworsification.”
Then again, as GauchoChris points out, just about everything dropped in 2008-2009. Not just stocks, but real estate, too. One good place to have been was gold, but gold has been a pretty lousy investment since then.
I wrote: In my view, investing requires one to predict the future better than Mr Market.
I’ve written that, or something very similar, more than a few times on this and other boards. It encompasses a number of thoughts including being a retail investor in a programmatic world, being a part time investor when others have many full time analysts, whether you can be smarter than the pros, and whether you can use metrics about how a company is doing to predict what it will do.
But Morgan Housel came out with a new post that explains some of this better than I ever did, and discusses why picking a winning company isn’t enough: http://www.collaborativefund.com/blog/every-great-investment…
Finding above-average investments requires either being smarter than others, or willing to endure more discomfort and uncertainty than others. …
Obviously you don’t make money if you’re wrong. What most people don’t realize is that you don’t make money if you’re right in consensus. Returns [or alpha] get arbitraged away. The only way you make money is by being right in non-consensus. Which is really hard.
He’s referring to Howard Marks’ 2-by-2 matrix of investment decisions, which looks like this:
But thanks to TMF’s state-of-the-art-in-1990 software, I can’t include the picture. So, I’ll use somewhat less than 1K words to describe it: Horizontal axis is Wrong at left and Right at right. Vertical axis in Consensus at bottom and Non-Consensus at top. Only the upper right quadrant (Right and Non-Consensus) has a green check.
This is my problem with Amazon. Everyone knows Amazon will continue to be successful. That’s why its valuation is so high. The question now is whether the company will be even more successful than Mr. Market (us all as a whole) thinks it will be.
My best investments have been those companies in which I had a strong conviction that Mr. Market did not share. TSLA in 2011-2012, and again during the car fires in 2013. ANET in early 2014 and again in 2015 when the lawsuits hit. Conviction can be profitable - and Housel argues that’s the only way to really make money in the market:
The point is that risk is required for reward, but risk isn’t just quantified in spreadsheets. It’s measured by the acceptance of doubt, and a willingness to make decisions that don’t make sense to many others, specifically because the gap between your check and consensus is where outperformance lives. In the most competitive markets, it’s where any results live.
don’t deny that diversity can be useful.
I have a dozen stocks in my portfolio. So am I diversified? Only company specific because almost all are software, and cloud in addition. The biggest risk is general stock market and owning lots of stocks doesn’t help much.
If I want diversity I would add SPY. Or hold more cash.
And keep a small gold silver diamond cache. Which has saved many a refugee, particularly easily hidden diamonds…
The good side of this concentration? High profits this year.
Stocks in companies in the process of changing the world are not going to go down a lot unless a recession is near . In fact their decline will be a slightly leading indicator of recession.
Stocks in companies in the process of changing the world are not going to go down a lot unless a recession is near .
I wonder how many people said this in 1999 about Amazon, which was changing the world of retail. It took a damn long time to recover from its enthusiastic high (about 10 years I believe). That dot com bust was a tech sector only phenomenon.
Specify how you define “bubble” and what sticks are currently at “bubble” valuations. Not "overvalued " but actually in a bubble.
Thank you.
Tinker
just about everything dropped in 2008-2009. Not just stocks, but real estate, too. One good place to have been was gold, but gold has been a pretty lousy investment since then.
My portfolio bottomed on March 6 2009 down 55% from the previous high, and I was fully invested and as usual I was living off the proceeds of my portfolio (no pension or annuities). While the portfolio value had dropped 55% the income portion of the portfolio only dropped 10% temporarily. Since the income I received was still more than what I spent I was adding shares at and near the market bottom to create additional income. The additional income made up for the stock that stopped paying and the additional shares bought helped the portfolio speed the recovery and reach new all time highs . Portfolio value on Friday July 14, 2017 is more than 10.5 times the value of March 6, 2009 and that is after all living expenses for all those years have been taken out.
The stock market is the greatest wealth creator IMHO. It does fluctuate violently sometimes and some fall by the wayside if they don’t have the stomach for it. It is best to be humble and alert and know your limitations. It might not be for everybody.
b&w
Specify how you define “bubble” and what sticks are currently at “bubble” valuations. Not "overvalued " but actually in a bubble.
http://ritholtz.com/2011/06/how-to-spot-a-bubble-in-real-tim…
Ant
Interesting, and I agree with most. But until you can put this into an algorithm that has high predictive power it is not much use. Too subjective , how high is too high?
Easy money , easy credit are behind almost all bubbles. But those same factors are what lead to bull markets and stock market profits. The key to profiting but getting out in time is knowing how long they will work. Not easy.
The easy money easy credit is in play now… And has been for nearly 9 years. A long time. Recent moves by the Fed are marginal.
Everybody is afraid to take the booze away, even though nearly everybody at the party is stumbling drunk already.
Everybody is afraid to take the booze away, even though nearly everybody at the party is stumbling drunk already.
Inflation can be dealt with. Deflation is a real risk and monetary policy may not work well against deflation. Currently there is no playback against deflation. The cost of energy is dropping and this is deflationary because energy is an input to virtually everything. AI will lead to efficiencies that will also have a deflationary effect. Central banks may be forced to keep rates low for much longer than people think.
Inflation can be dealt with. Deflation is a real risk and monetary policy may not work well against deflation. Currently there is no playback against deflation. The cost of energy is dropping and this is deflationary because energy is an input to virtually everything. AI will lead to efficiencies that will also have a deflationary effect. Central banks may be forced to keep rates low for much longer than people think. – GauchoChris
Unfortunately, the Fool system only allows me to rec a post once, even one with superior insights.
Thanks for pointing out these additional “worrisome” inputs. I have some significant concerns regarding unemployment in the wake of widespread AI. That will be deflationary as well. So we have a number of compounding deflationary inputs. Maybe this will all lead to the implementation of the idea of “universal guaranteed income” for people here in the US… a topic that raises a lot of issues in and of itself.
Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.
Macro Exonomics is a great way to make a small fortune.
Out of a large one.
Cheers
Qazulight
Excellent OT thread with some VERY valuable lessons, but we’ve got 35 posts on the thread now, and it risks veering off now into political stuff, with the attendant probable angry arguments, and the ending of friendships and cooperation ---- SO LET’S EASE OUT OF THIS THREAD UNLESS YOU HAVE SOME LAST WORD YOU HAVE TO GET IN (JUST ONCE AND BRIEFLY).
Thanks so much for your cooperation,
Saul
Thank you, Saul, for your steady hand in keeping this board from wandering into the wilderness of politics and God knows what else.
We have the best board in the Motley Fool kingdom. Let’s keep it that way.
Jim
God knows what else.
Like REITs … shudder 
Depending what level you are looking at, convictions can change and sometimes quickly. It depends on how you define ‘conviction’. Regardless, a conviction is never a really conviction since there is always (known and unknown) unknowns and uncertainties.
Once you form your conviction, it can lead you to do dangerous things. Putting some weight towards a stock because of ‘conviction’ is one thing but going ‘all-in’ is another.
I think your lesson is about using leverage very carefully when you have some kind of a conviction. When the situation turns, great gains become great losses in the blink of an eye. If you haven’t used leverage, your losses would have been much smaller and you could have held and gotten out of the 2016 lull unscathed and you would have been in a much better position without exposing yourself to any additional excessive risks.
When investing in stocks, diversification is a good way to spread the risks. Despite your convictions, nothing will ever go the way you wish it to. We never know when the next lull or market reversal will happen and during such an event you want to be prepared to go through it with minimal damage. Even with 10 or 12 stocks, I would not consider that ‘diversified’ especially when all the stocks are in the same sector.
tj
TJ,
Have you read the knowledgeboard and Sauls monthlies? If so it actually disproves your point…
" If so it actually disproves your point… "
Yes I read Saul’s. I would not use the word prove or disprove in this discussion because there is no way to do so.
But which point you were you talking about?
Diversification? Most Saul’s stocks are in one sector. This sector is growing so everyone is happy. But one would do that in the perspective of changing markets.
It’s a bit like what the original poster was talking about using leverage while under his own conviction: it goes well as long as it does, and one day it does not anymore.
tj