Yesterday I made a humorous (attempt anyway) reference to Nuvelo (NUVO) which was down about 80% on bad news about test results.
This prompted several comments making fun of the Street.com guy who touted and sell side analysts (who apparently were generally bullish on the name) who cover it and had to change their ratings after the news.
I had never heard of the stock and don't know who at theStreet touted it. If it is a one drug, small cap biotech; well when you swim around the Farallons you are going to have problems.
This brings up an interesting point. The stock was/is a lottery ticket. Owning one or two lottery tickets totalling no more than a couple of percent of your portfolio is not crazy reckless, it may be too much for you or someone you know but a 2% weight in this NUVO would have made for a bad day not financial ruin.
Do you own any lottery tickets? What would be your state of mind if your lottery ticket went down by 80%? Depending on your answer should you sell your lottery ticket now before it has death blow news?
The question and answer here has nothing to do with fundamentals or the story or even portfolio construction. I guarantee there were some people that owned NUVO in a reasonable weighting that freaked out because of the decline. Figure out if this would be you or not--if you even own a lottery ticket--and do what you need to do to avoid a freak out, or if you prefer a phreak out.
On a more serious note was this comment from someone who says he had 25% of his retirement in the stock and is dealing with a six figure hit. Based on the wording of the comment, which is all I know about this, I can't conceive of how anyone could think 25% in any one thing makes any sense. The other day the topic here was whether 20% was too much for REITs, as an asset class.
If memory serves, biotech is about 3% of the market this person had 25% in one biotech stock. Sorry for that person but this is the exact opposite of what have I have been writing about here since I started and this example is a case in point of what I was talking about. If you have 25% in one stock you are taking an absurdly colossal risk.
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4 comments:
Just another example of why diversification with your "permanent portfolio" is essential. Your "speculative portfolio" should include some higher risk investments,but in reasonable proportion.
Many individuals have a large proportion of retirement funds invested in their employer's stock. As we observe time and again, how truly sad a position that is for most over the long term.
I may decide to publish a book entitled:
WATCH T.V. AND DIVERSIFY
$35.95
"If you have 25% in one stock you are taking an absurdly colossal risk." True, but one that can payoff - I worked at Progressive for 9 years and left 2 years ago where I sold everything. I had 100% 401k contributions into prog stock only. Colossal risk? yes but with 40 and 50 years until retirement and then another 30 years to protect against in retirment, most portfolio allocation theories are way, way to conservative.
to 9:48 anon. some folks will take that risk and some will not. I will not.
the issue is not the 25% concentration. In 2000 if you were "diversified" in couple of hundred Nasdaq stocks you would've faired a lot worse than having all your money in a big bank stock (BMO, C, ...) or one energy stock (XOM, ...).
The matters to consider are the fundamentals of the company, the technicals, cost basis and accumulation strategy.
Do you think Bill Gates or the GOOG dudes are taking on more risk than you because their portfolio is concentrated in MSFT and GOOG and yours isn't?
If I had started putting my money in BRK many moons ago, and pyramided and accumulated on the way up, i would be very happy to be concentrated in that stock.
Putting your money in a loser company that falls apart on the whim of some analyst or a piece of news is risky. The risk in this case is due to the choice of investment, the cost basis and the entry strategy, not due to high concentration... IMO.
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