This was a skit from SNL in the 70's where Steve Martin was the barber at a time when barbers practiced medicine. You can imagine how silly some to the medical procedures were.
I stumbled across an article from Investors Business Daily last night that made me think of Theodoric of York, Late 1990's Financial Advisor. This was adapted from an article first published in 2002. It extols the virtues of not being diversified, unless "you have a billion dollars to invest. Spreading the risk makes tons of sense." That's the first sentence of the article.
Huh? The article goes on to say if you have $10,000 you should own two or three stocks, $25,000 and you should have three or four stocks and with $50,000 and above (until you get to a billion I presume?) you should own four or five stocks. The reasoning is that you can't possibly keep track of 20-30 stocks and you will dilute your returns.
What is disappointing about the article is it comes up way short of explaining the consequences of such a narrow approach. My take on the article is that the authors don't have respect for whatever it takes for a person to accumulate what they have. I can't figure how owning six stocks isn't reckless.
For all I know IBD may literally be the best stock pickers pickers on the planet. If they are, that means we are not which would be all the more reason for this being a bad idea.
The article says you will be wrong sometimes and you should sell when a stock drops by 7%-8%. I wrote about this before using Proctor & Gamble and Ask Jeeves as examples. Having the same exit strategy for two totally different types of stocks makes no sense to me.
When you pick an approach that is remotely similar to what is suggested in the article you are relying on a lot of things to go right. First you are relying on your ability to get it right. Then you are relying on the market to also get it right. You relying on nothing bad happening to a competitor ( in terms of, as an example, Intel sneezing and the rest of the semis getting a cold). You are relying the market not getting crushed by bad market related news. You are relying on the market not getting crushed by non-market related news and there are more things than this to worry about.
Clearly some people are capable of doing well with this strategy but they are still taking the same risks.
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5 comments:
Roger:
This one thing that frustrates me about so much advice. It states what people "should" do.
People have different needs and strategies. Most would be content with "dull returns," 2 or 3 percent above inflation with dividends. It adds up. Especially if one gets in there young.
I have mixed feelings about the "Vanguard" approach. I think it possible for people who spend some time looking to ride certain cycles and sectors. I think it possible with some research (background on country, sector, company as wel as numbers) to pick stocks. For example a year ago it was a pretty good bet for the medium term (2 to 3 years) that certain foreign stocks and ETFs would do well.
On the other hand individuals ability to analyze and the time they can devote is often limited. For many dropping a few hundred amount into a general index is a simple way to go and with a 20 or 40 year time frame the odds are high that it will pay reasonably. Indeed the studies indicate that this will result in better returns than the *majority* of people including experts who try to be clever.
I find it immoral that so many writers are feeding the arrogance of individuals who want to believe that they are the clever minority. I've been fortunate in the choices I've made, and I've made some observations on shorter term behaviors. I can see how some can ride short term waves and make a profit. And now I've reached the point where I probably know enough to make a reasonable choice about which experts I might entrust to manage money in that way.
I don't think it would be the type of person who wrote that article. For example right now I would suggest to people that they hold lots of cash. And to start putting it into domestic stocks at precisely the time when this advisor and lots of others say take it out, when some severe bumps hit and the market goes down.
Of course this is my philosophy. But I do think that the philosophy proposed here has hurt lots of people and well continue to do so. I think if one has 20 or 30 thousand dollars and wants to speculate on high returns then the rational course is to use the time spent obsessing on stock screens and use it to research and start a small business. The odds of good returns are higher because one has the "sweat equity" and the learning process, all the details and skills serve one well even if the money is blown.
I do think people have a moral responsibility and this kind of commentary encourages the gurus one sees on Yahoo finance groups and also the tragedies where individuals invested a huge chunk of their wealth in a hot stock, then sold in a panic as it fell. Certainly clever investment picking and gambling a lot is a way to make some nice big money. But my own belief is that it takes years of experience and "objective" watching of smaller investments to make a reasonable guess. And this is for someone with the proper analytic skills and temperment.
I am disturbed by these articles about how "you can make really, really big money in the stock market!" They play to a vulnerable population and unlike the purveyors of illegal frauds the individuals writing these things for allegedly respectable publications don't even stand to make big money.
I am quite willing to concede that some can consistently "beat alpha" but there needs to be warning that's not most of us. And people need to know that there are differing strategies. For example Buffet's partner (whose name I forget) also recommends a few good investment choices, but I would strongly suspect he would be appalled by the advice of selling tem if they go down 8%.
David
Thanks for the comment. You are spot on about a lot of people wanting or only needing a couple of points above inflation. I hear that a lot.
Buffett's partner = Charlie Munger.
I like the Vanguard approach. Most of their funds still have fairly low entry amounts of $3000 so, our friend with $10,000 could get into a U.S. index fund, a bond index fund, and an international index fund and have a grand level of diversity.
With $10,000 to start the last comment makes a great point. There is a guy who writes for MarketWatch named Paul Farrel. He writes often about a "lazy portfolio." The strategy clearly has a place in certain circumstances. Good stuff.
I believe Vanguard let's you come in even lower than $3,000 if you agree to regular contributions. Certainly some other indexed funds do and I also believe that funds are availible that include a mix of foreign and domestic.
So basically the kid working at high school can in theory drop in a hundred a month, possibly continue this through college, up the amount a bit during their first job. The "cost averaging" means they buy during a lot of low points.
The charts the mutual funds give for this kind of thing are interesting. If you start young, you can stop investing in your late thirties or early forties and wind up with more than someone who starts putting in larger amounts when they're older.
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