The fear of missing out

The fear of missing out often plays into our investing decisions. The tendency can be to hold onto shares where we know things aren’t going that great but we want to wait and see if things improve because we don’t want to miss out of a possible, potential big gain. An recent example is Anirban’s recent deliberations on INVN. He knew there are better places for his money so he was reluctant to sell. He did find Bally end up selling his shares but was unable to completely let go of the feeling of not wanting to miss out: he replaced his shares with Jan17 long calls despite his own analysis on the questionable future of INVN. Anirban, I’m not picking on you in particular but just using you as an example to illustrate how strong the feeling of not wanting to miss out can be. Interestingly, Saul has managed to completely let go of the feeling or at least on failing to act on that feeling. Maybe that’s one reason why Saul has such great results: he looks at the information in front of him rather than holding on what he HOPES might one day be. In a way the MF reinforces our hope of what might be and our feeling of not wanting to miss out. Next time you read posts on the various MF boards try to notice how often people justify holding on despite the poor performance. As we get better and better at analyzing companies we will become more confident in our own abilities and have more conviction to make wise buy and sell decisions without being lured to hold on because we don’t want to miss out.

Chris

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A wise man once said that hope and investing should never be used in the same sentence.

I agree with that.

example:

There are some hoping that WPRT return back to their break even price…if one looks objectively, WPRT may need to increase 10x in value to get to that point…not saying that it couldn’t happen…but hoping that it could happen is misguided investing…

Don’t price anchor to what you paid.

Cutting your losers is hard…

Hoping that it rebounds, or investing in the thesis that things will turn around may hamper your investing results…

I am slowly learning this…

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Chris,

Thanks for picking on me :slight_smile:

What you posted was exactly what my wife and I were discussing yesterday evening when we were driving to the beach. I think part of the issue here is the idea that a company that is underperforming today could become a big winner many years from now. Amazon is often cited as an example of a business that has undergone so much transformation and early investors have been richly awarded. I think the rationale approach to this dilemma is to realize that such transformations are rather uncommon (they don’t happen often) and that if there’s a transformation happening then it will not be an overnight process, thus offering another opportunity to get in provided one’s keeping track of the news.

My solution is as follows - once I have determined that the budiness is truly not performing to my expectations I am going to sell it. Prior to selling, I do couple checks. One, I revisit my thesis, and see if this was a secular play into some trend. Two, I check the valuatjon to determine if the stock appears to be cheap. Both steps are subjective. If both questions return a “yes” answer I consider replacing the stock with leaps preferably with strikes around the current share price so that upfront cash investment is small.

Another thing I do is to leave the company I sold on the Fool’s ‘My Scorecard’. That ensures I get the news relevant to this company. If things turnaround, I can always get back in.

A work in progress.

Anirban.

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Super post, Chris.

The fear of missing out, as you put it, leads to unhealthy emotional attachments to our stock holdings that inevitably lead to loss of our real hard earned money. After all, could I have been THAT wrong on such a promising investment??? I confess to this weakness and have had to really discipline myself to periodically sell those investments that have so obviously trended downward in earnings or cash flow.

My great awakening occurred several years ago when I saw this fella named Saul, bravely and all by himself, take on virtually the entire WPRT board. He calmly explained over and over how hopeless this company was becoming financially because of increasing crazy spending that only was worsening quarter by quarter and placing the company into a deeper and deeper financial hole. But the HOPE was just too great for those that would have nothing to do with this warning, this heresy. After all, even the MF experts were continuing to recommend buying WPRT. However, there was NO DISPUTING OF HIS FACTS! WPRT’s story was just too full of hope and promise. Now 3 years later, his warnings have been proven to have been spot on. Indeed the emperor had no clothes. Sadly, so many lost so much.

Learning to see things AS THEY ARE regarding each stock can be very very difficult……especially when the crowd is all agreeing that this stock can’t miss. However, as an analogy, consider how objectively seeing our own children as they really are can be almost impossible at times.

Bottom line, great information that leads to undeniable conclusions trumps hope every time. Hope is a wonderful character quality for us…but not in the world of investing.

JIm

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Great post, Chris, thanks for posting it.

The fear of missing out often plays into our investing decisions. The tendency can be to hold onto shares where we know things aren’t going that great but we want to wait and see if things improve because we don’t want to miss out of a possible, potential big gain…Saul has managed to completely let go of the feeling or at least on failing to act on that feeling.

I do try to let go of the feeling. One way is to focus on the stocks I’m in, instead of obsessing about the ones I got out of. I will keep some of the stocks that I’ve decided against on my news feeds for a little while at least, just to see what happens, but usually drop them off after a while.

In thinking about it, I may have learned to get out during the Internet Bubble, when the analysts were saying “Buy Buy Buy, ABC is 200 times sales, but comparable are 400 times sales so it’s cheap.” I’m not exaggerating. They did say that. After three days when YHOO went up $30-$50 per day for three days, I said to my wife, “This is crazy, I’m getting out, of all of them. They may keep going up but I’ll let someone else have the rest of the ride”. (That’s the key way to think of it. If it does go up someone else can have it). I did get out and into non-internet stocks. The internet favorites kept moving up for a couple of weeks (more slowly) and then the bubble broke and YHOO, AOL and AMZN, the three darlings, lost 95% of their value. (Many others went broke altogether.) AMZN took 10 years to come back, YHOO and AOL never came close. I quit worrying about what the ones I had gotten out of did. I can’t invest in every stock, and some I choose not to invest in will inevitably do well. So what? I sold out of AAPL at about $560 a few years ago. That’s about $80 pre-split. I had to look it up to see where it is now. I just don’t pay any attention any more.

Best,

Saul

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Saul,
Let me ask you another question if I may. I think you were having apprehensions about Syna when you asked Neil what he thought about the stock, (I agree with what Neil said and I was worried also because of the market share Samsung is losing to Apple) but why did you decide to not sell?

Thanks,
Andy

Another thing I do is to leave the company I sold on the Fool’s ‘My Scorecard’. That ensures I get the news relevant to this company. If things turnaround, I can always get back in.

Anirban, If you don’t also use a Seeking Alpha portfolio with “alerts”, you should. You get the news much quicker and learn instantly when the transcripts, etc come out.

I leave stocks on my alert portfolios for a while sometimes, just in case, or out of curiosity. I initially took look-and-see tiny positions in INVN and SWIR when they were first recommended, and then quickly sold out, when it was clear the rates of growth weren’t in the same ballpark as the PE’s. Then when I found SWKS, which was also in the internet-of-things area, and was knocking it out of the park, I just forgot all about the other two and quit paying any attention to them. I sold out of UBNT at $29, for the reasons I discussed here at length, and then followed them out of curiosity. Neil’s nice write-up got me to take another “tiny” (less than 1%) position, which I let go of, after a week or so, to raise cash for EPAM. I’m willing to sell out of the look-and-see positions without compunction if I change my mind. (I wasn’t trading the tiny UBNT position. I’m not even aware if I made or loss money on that tiny position. I just had much more conviction about EPAM.) Once I have a good position though, like my position in EPAM, it would take a lot more to make me sell it.

Just rambling…

Saul

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Saul, Let me ask you another question if I may. I think you were having apprehensions about Syna when you asked Neil what he thought about the stock, (I agree with what Neil said and I was worried also because of the market share Samsung is losing to Apple) but why did you decide to not sell? Thanks, Andy

Andy, for the best answer to that, look at my “Year End #15” discussion of SYNA. Those year end discussions tend to give you a pretty good idea of my thinking.

http://discussion.fool.com/year-end-15-syna-a-temporary-stall-31…

Best,

Saul

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Anirban, If you don’t also use a Seeking Alpha portfolio with “alerts”, you should. You get the news much quicker and learn instantly when the transcripts, etc come out.

I do this but not methodologically. I haven’t cleaned up my Seeking Alpha portfolio in a while and I also might not have added some. I should do this more systematically.

Anirban

This is a great discussion! Selling is a torment for me. Over a year ago I posted on I forget which board that I felt TMF was a lousy service when it came to selling advice (or words to that effect). I observed that even Cramer provides sell advice, and not just hitting his “Sell! Sell! Sell!” button when someone asks about a ticker, but what to look for like if a retailer has 3 consecutive quarters of declining same store sales it’s time to get out. We can argue about this rule, but at least it’s a general rule you can chose to apply or ignore.

For background, I’m retired, I have a decent retirement income for now, but eventually I anticipate inflation will outstrip my income. So far, I have not drawn on my portfolio for day-to-day living expenses. My wife is Chinese and abhors debt. We decided to pay off our mortgage. This addresses a bunch of our needs: 1) Removes our primary debt. I carry no consumer debt. I have co-signed my daughter’s student loans and expect to pay them off in full. I have a portfolio set-up specifically for this purpose. 2) Gives us piece of mind, no matter the vagaries of the economy and the stock market, we have no significant debts. 3) Increases disposable income, money that was going towards a mortgage no longer does. I anticipate I’ll stick some of it right back into market. 4) I get the increase in disposable income without any increase in taxes (OK, I lose the interest deduction). 5) Better than bonds. Some might argue this point, but I have a big house in a highly desirable location, market equity continues to go up. 6) Source of income, I have a mother-in-law apartment in my basement which is easy to rent. 7) I get to take advantage of a special tax situation due to a large charitable gift from my mother’s estate (I’m also consuming that gift write-down by converting my traditional IRA to a Roth).

But, I don’t have a bucket of cash sitting around for things like paying off the mortgage. The biggest downside is that I have to sell a significant part of my investments to do this. Objectively, it’s not the best use of capital. I am able to get much better returns from investments than I what I must pay in interest. But, it is a life decision, not just a financial one.

Decision made - I wanted some advice. I was not asking which stocks I should sell, I was looking for decision criteria, how do I decide to sell A instead of B. And strategies, like don’t sell all of a position if you really like the company, sell some of A and some of B. If you have a window, consider selling covered calls. That kind of stuff.

Instead of getting advice, I managed to raise the ire of David Gardner who really took offense to my use of the term “lousy”. I was surprised. I never expected that he would even read the post, let alone take the time defensively reply to it. I’m not like a super-active member of TMF, I’m not posting all over the boards, in fact at the time you could probably have counted all my posts with just your fingers.

Anyway, this thread has been very enlightening. My dilemma has usually run like this: Company A has performed really well, why would I sell a winner? It’s probably going to keep on winning. Or conversely, Company B really turned sour, but it could turn around (like some of those energy stocks I bought for the handsome dividends). Oil won’t be $50/bbl forever (or whatever the case may be). Why realize the loss? But, in retrospect, it was the need to raise cash that got me out of WPRT before it totally crumbled.

So the thing about “missing out” is that we are always missing out somewhere. If we hold our losers because we fear missing out on the turn around, we’re missing out on something that’s performing well right now. Same goes for winners that have hit the pause button, and now just meander.

This would be my primary gripe with TMF. I forget which service (I think RB) did a review of their rare sell recommendations only to find they would have had better performance if they had not recommended any sells. So what? They may have had much better performance if they had sold more with associated buy advice.

I get it, the TMF philosophy is “buy and hold”, and to be honest, I pretty much subscribe to it. Companies don’t hit their stride overnight and sometimes it takes patience. I think it’s really hard to make money as a trader. I believe in fundamentals. I’ve looked at technical stuff, and I get that philosophy as well. The market acts like a herd, and the herd mentality is discernible by studying the charts. My problem is I just can’t discern heads and shoulders, or what to make of one average crossing another and crosses back and back again and blah, blah, blah. It’s like reading tea leaves to me.

I guess the main thing is keep looking forward, and keep looking around. Looking backwards doesn’t help you, often just the opposite.

Guess I better put in a sell order on that INVN . . .

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Two, I check the valuatjon to determine if the stock appears to be cheap. Both steps are subjective. If both questions return a “yes” answer I consider replacing the stock with leaps preferably with strikes around the current share price so that upfront cash INVESTMENT is small.

Your second step doesn’t make much sense to me because I wouldn’t expect you to invest in over priced stocks to begin with; we’re all looking for undervalued stocks with huge potential. Also if the company is underperforming and you bought it subjectively cheap, of course it’s still going to be cheap and look like an even better value to you at present day.

So it seems like there’s only one step on the checklist from my point of view, the second just seems to be false reinforcement to hang on.

Sweetadeline

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Selling is a torment for me.

It needn’t be. If you have two stocks and must sell one, pick the one that you expect to yield the lowest CAGR (assuming the same level of risk). If you can’t make up your mind, sell half of both or sell the riskier one.

CAGR is the ultimate arbiter, all else being equal (Ceteris Paribus).

Denny Schlesinger

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Brittlerock, I am speaking for myself here, I am on TMF farm team but I work on Supernova.

I see two problems one there are enough subscribers here that we do move the markets, those with access to the relevant paid services know what I am talking about. There was a sell recently by a service that tanked a stock being held in another service. Very painful, subscribers were advised to use limit orders and patience, but clearly lots used market orders. Recriminations flying around the boards…

Second, Saul has a rare and helpful temperament. I don’t think that investors in general are able to shrug off selling a stock that goes on to do very well. So Sauls style may not work for them.

No one knows the future of the companies we buy, but successful companies share a lot of traits that we look for, we look hard. We debate. We ponder and study. And really I woulnt have it any other way. Sure I want financial freedom, but I also want the satisfaction know that I did it through effort. Doing via stocks means it is repeatable, I am not trying for a lottery ticket…

It needn’t be. If you have two stocks and must sell one, pick the one that you expect to yield the lowest CAGR (assuming the same level of risk). If you can’t make up your mind, sell half of both or sell the riskier one.

CAGR is the ultimate arbiter, all else being equal (Ceteris Paribus).

Yeah, right, Denny . . .

Just that simple.

BTW - How do you predict CAGR? And about that risk assumption, what’s the fool proof (or Fool proof, if you prefer) way of making that assessment? And you admonish, all else being equal (Ceteris Paribus), this too seems to elude me more often than not.

Please be so kind as to specify in simple (preferably programmatic) terms how to arrive at these conclusions and I’ll be sure to apply them to my next selling exercise. In fact, I’ll apply them before I buy anything, and once I arrive at the company which best displays these characteristics, I’ll load up on it to the exclusion of all others which by definition will perform less well.

Thanks,

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Flygal,
OK - It’s true that I did not consider the impact that issuing a sell recommendation in one service might have on the buy or hold recommendation in a different service. I guess that’s the nature of having more than one service with different folks on staff.

But how’s that different from any other company with similar structure (I’ve not investigated, but I assume there are such companies). Or from investing in general. People pick the advice they want to follow. They pay for some of it, or it’s paid for via advertisers or whatever. Some services say “buy” some say “sell” and the market reacts the way the market reacts. What’s new?

The fact remains, for the most part, TMF does not say “sell”.

And once again, I did not seek advice on which stocks to sell. I was looking for decision criteria. I’ve reiterated this about a dozen times and is continually neglected. What I was then and continue to seek is decision support, not stock recommendations.

You stated: … successful companies share a lot of traits that we look for, we look hard. We debate. We ponder and study.

OK, why can’t at least some more effort be put into looking for the traits that would suggest it’s time to get out of some previous buy decision? Why not debate, ponder and study the proposition that not everyone makes every investment with the desire (or ability) to hold until the end of time?

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I get the frustration brittlerock, I think more sells might be in order. I sell recommended stocks, but I also bailed out of most of my Dolby when it was down, and saw it come back to good returns. And can we talk about the Netflix swoon? It is not easy to know when problems are temporary. Maybe the TMF can do better, or maybe it is just too hard a problem; an important problem, but still maybe to difficult.

I am confident we will TRY to get better. But the Fool beats the market, I am not sure that reducing the percentage of losers will impact the overall performance much. The outsized winners make the most impact. TMF1000 and Anurag have made the case on that so I won’t belabor the point.

For my own investing when I get really uncomfortable with a stock, I try to keep a small stake, if I sell. That way if I am wrong I still have some shares. tom e always says- if you are right you only need a little.

BTW - How do you predict CAGR?

Thanks for asking!

Obviously I cannot predict future CAGR reliably but I can see the historical CAGR and make what I consider are reasonable assumptions. For the past ten years or more I have increasing emphasis on a stock’s growth. Your portfolio’s performance is the sum total of each position’s weighted performance. I have to credit the BMW Method for putting me on this track and Mike Klein (Fool mklein9) for the charts his website produces on a weekly basis. On good way to access his charts is though

BMW Method Screen Cross Reference Run on 02/01/2015
http://invest.kleinnet.com/bmw1/xref.html

And to find out what it is all about, visit:

Introduction to the BMW Method Screen
http://invest.kleinnet.com/bmw1/intro.html

These charts are updated automatically on weekends. Then my robot grabs his files (from here: http://invest.kleinnet.com/bmw1/index.html ) and updates my buy and sell screens: http://bmwmethod.com/screens/screens.php?side=buy

Jim BuildMWell abandoned his board after getting a lot of flak after the 2008 debacle. I kept chipping away at CAGR and at the systemic nature of markets. While short term results are apparently random longterm results have discernible patterns. Not exact predictions by any means but what might be called educated guesses or improved probabilities. Ben Graham said it best: “In the short run the market is a voting machine but long term it is a weighing machine.”

My contention is that stocks act in predictable ways: cyclicals will cycle; growth stocks will create an “S” curve; consumer staples will revert to the mean; biotechs and other development type companies will soar or crash; fast growers will drop by 50% at any time (SSYS?). I just read a mystery novel that said that there are many ways of committing suicide but unsuccessful suicides stick to one or at most two ways of killing themselves. Same with stocks, they stick to their growth patterns.

The object of the game is to increase the CAGR. One way to do so is to sell covered calls when buying a stock making sure that if the stock is called you get a high enough CAGR to have made it worth while. A real life example:

On 3/11/2008 I bought shares of AXP at $42.88 and sold Jan 2009 $45 calls for $5.80. With stocks crashing volatility was great!


AXP         42.88
CALL        -5.80
Cost        37.08

If called   45.00
Profit       7.92
CAGR       25.42%

My timing was terrible. The stock continued to fall like a rock and the call expired worthless. But AXP recovered as I expected it would.

http://invest.kleinnet.com/bmw1/stats30/AXP.html

There are several things you can see in the chart. $37.08 was a good entry point, below the mean. The most you can expect from AXP in the long run is around 12 to 13% CAGR. At over $90 the price has reached the mean. Not on the chart, volatility is too low to make it worth selling covered calls. I did sell a covered call on 5/4/2012 that netted me 5.2%. On 11/24/2014 I sold the position because I could not see it producing a better CAGR than I already had, 15.4%. Time to sell and wait for the next dip/opportunity.

I still have a loss in AIG which I also initially bought in March 2008 (I tend not to sell my total losses). After the bailout things were turning around and I tried to find a way to sell my rump position after the 20::1 reverse split. I figured to buy enough to make a round lot and to sell a covered call and be done with it which I did on 5/12/2012. But instead of rising the stock fell so I took my profits on the call and started to collect the newly reinstated dividend. AIG paid back the government, sold lots of assets including the airplane leasing company. Positive articles were appearing about AIG and how cheap it was relative to book value. By today I have a CAGR of 26.2% on the second stage of AIG but it is selling at 65 to 70% of book value and book value rose 15% in 2014. So AIG is not a sell.

To be able to do this, my tracking software keeps track of CAGR, essentially spreadsheets using the XIRR function.

Denny Schlesinger

PS: Fast Growers in a follow up post

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brittlerock had some additional questions besides how to predict CAGR.

BTW - How do you predict CAGR? And about that risk assumption, what’s the fool proof (or Fool proof, if you prefer) way of making that assessment? And you admonish, all else being equal (Ceteris Paribus), this too seems to elude me more often than not.

Let’s start with risk. That’s an elusive term that we all think we understand but few can define in terms of a portfolio. Frank Knight distinguishes two terms that are often commingled, “Uncertainty” and “Risk” proper, stating that Uncertainty cannot be measured while Risk can.

One way to handle uncertainty is with horse sense but it is not the only way. In my prior post I said that I have been studying “the systemic nature of markets.” Short term price moves are essentially random but not entirely. According to Benoit Mandelbrot prices are fractal which is the reason why candlesticks work the same on charts of various frequencies, daily, weekly, hourly. Various techniques have been developed to take advantage of charting information. Most, it seems to me, try to predict price moves which works until it doesn’t. I do it the other way around, just react to prices: if it goes up, take profits and if it goes down, buy more but only with stocks that you want to hold long term and only with part of the position.

On to Risk proper. As far as I know, the only method used to put a number on risk is to equate volatility and risk. Since I don’t believe that volatility is synonymous with risk I have no way of measuring it. Therefore I can’t apply risk to my investing. What I do instead is to study the company’s business strategy and based on experience determine if it makes sense or not. If yes, then do a certain amount of fundamental analysis. If that passes the smell test then try to see where the stock price is in relation to history. If there is enough of a discount, then it’s a buy but only a fraction of a full position. The rest will be added as price swings permit.

Frank Knight makes interesting reading. I was only interested in the definition of “Risk” which you’ll find in the linked excerpt. While Knight talks about Risk and Uncertainty in terms of profit, it works equally well in terms of portfolios:

Risk, Uncertainty, and Profit

[excerpt]

I.I.25
Our preliminary examination of the problem of profit will show, however, that the difficulties in this field have arisen from a confusion of ideas which goes deep down into the foundations of our thinking. The key to the whole tangle will be found to lie in the notion of risk or uncertainty and the ambiguities concealed therein. It is around this idea, therefore, that our main argument will finally center. A satisfactory explanation of profit will bring into relief the nature of the distinction between the perfect competition of theory and the remote approach which is made to it by the actual competition of, say, twentieth-century United States; and the answer to this twofold problem is to be found in a thorough examination and criticism of the concept of Uncertainty, and its bearings upon economic processes.

I.I.26
But Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term “risk,” as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. The nature of this confusion will be dealt with at length in chapter VII, but the essence of it may be stated in a few words at this point. The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. There are other ambiguities in the term “risk” as well, which will be pointed out; but this is the most important. It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term “uncertainty” to cases of the non-quantitive type. It is this “true” uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition. [emphasis added]

http://www.econlib.org/library/Knight/knRUP.html

On to all else being equal which brittlerock claims “seems to elude me more often than not.” Seldom in life do we find identical situations. In boxing and in horse and yacht racing we have found ways to try to equalize the participants to create an even playing field. But, of course, all we ever get is an approximation.

What I mean by “all else being equal” in terms of CAGR is to compare the various positions taking into account the nature of the stocks. Compare fast growers vs. fast growers, stalwarts vs. stalwarts, increasing returns vs. increasing returns which have different natural rates of growth.

brittlerock ends his questions with a snide remark: "In fact, I’ll apply them before I buy anything, and once I arrive at the company which best displays these characteristics, I’ll load up on it to the exclusion of all others which by definition will perform less well." which means he is not following along.

As I said before, “Thanks for asking!” Portfolios have to be balanced between efficiency and sturdiness. Owning the single best asset is clearly the most efficient but it makes for a fragile portfolio, hence diversification. I hope that answers brittlerock’s question of why one has more than one stock even if they are not the absolute best. It’s exactly the same reason why one buys insurance.

Denny Schlesinger

I’ll try to get around to fast growers.

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