Comments on: The best stock tip that I can give http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/ A site to share my tips, tools, and humble thoughts on the journey to wealth Wed, 17 Mar 2010 18:12:32 -0700 http://wordpress.org/?v=2.8.5 hourly 1 By: Fat Pitch Financials http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/comment-page-1/#comment-1265 Fat Pitch Financials Mon, 11 Sep 2006 10:34:33 +0000 http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/#comment-1265 <strong>Festival of Stocks #1...</strong> Welcome to the first Festival of Stocks! The Festival of Stocks is a blog carnival dedicated to highlighting bloggers best recent posts on stock market related topics. I want to thank everyone for helping me start this new weekly online event for the i... Festival of Stocks #1…

Welcome to the first Festival of Stocks! The Festival of Stocks is a blog carnival dedicated to highlighting bloggers best recent posts on stock market related topics. I want to thank everyone for helping me start this new weekly online event for the i…

]]> By: Frugal http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/comment-page-1/#comment-1230 Frugal Fri, 08 Sep 2006 06:04:21 +0000 http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/#comment-1230 Doug, Not sure if I agree with you completely on diversification. Unless every year, you can be smarter than most mutual fund managers who work full-time on managing money, otherwise, how can you generate 20% every year? Concentration has its risk. And it doesn't take too many times of you being wrong to wipe you out. If you have 30%, 30%, 30%, and then -55%, in year 1, 2, 3, and 4, repeating the same sequence over and over, your money will stay at 0% because 1.3 * 1.3 * 1.3 * 0.45 is about 1. How many times in a row do you think you can be right (in your bigger bets)? The answer is certainly a finite number. Once the string of luck runs out, are you diversified enough to prevent a wipe out? Doug,
Not sure if I agree with you completely on diversification. Unless every year, you can be smarter than most mutual fund managers who work full-time on managing money, otherwise, how can you generate 20% every year?

Concentration has its risk. And it doesn’t take too many times of you being wrong to wipe you out. If you have 30%, 30%, 30%, and then -55%, in year 1, 2, 3, and 4, repeating the same sequence over and over, your money will stay at 0% because 1.3 * 1.3 * 1.3 * 0.45 is about 1. How many times in a row do you think you can be right (in your bigger bets)? The answer is certainly a finite number. Once the string of luck runs out, are you diversified enough to prevent a wipe out?

]]> By: Doug http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/comment-page-1/#comment-1225 Doug Fri, 08 Sep 2006 05:26:04 +0000 http://www.1stMillionAt33.com/2006/09/the-best-stock-tip-that-i-can-give/#comment-1225 Great post. I agree with you that the next decade will not be a good one for index investors. A weakness of index investing is that it does not prevent major drawdowns when the market itself does poorly. In fact, one of the things that kills people's success in stock investing is that they leave themselves too exposed to poor investments, and so suffer PORTFOLIO losses of 30-50% when the market has a 1973 or a 2000. A 30% drop eliminates a 50% gain. A 50% drop eliminates a 100% gain. As an investor, I always want to minimize my downside risk. Successful investing means concentrating your money in a few really good investments - which often violate the "risk-reward" rules of portfolio theory. As a part-time investor, I know that I am only likely to have a few good ideas in any given year. That's ok, as long as those ideas earn me 20% or more on an annualized basis. Fortunately, by concentrating my money in those few investments, I don't have to find very many. One or two picks a year is all I need. It is focus that makes you rich, diversification just forces you to purchase some bad investments in the hope of finding a few good ones. Great post. I agree with you that the next decade will not be a good one for index investors. A weakness of index investing is that it does not prevent major drawdowns when the market itself does poorly. In fact, one of the things that kills people’s success in stock investing is that they leave themselves too exposed to poor investments, and so suffer PORTFOLIO losses of 30-50% when the market has a 1973 or a 2000. A 30% drop eliminates a 50% gain. A 50% drop eliminates a 100% gain. As an investor, I always want to minimize my downside risk.

Successful investing means concentrating your money in a few really good investments – which often violate the “risk-reward” rules of portfolio theory. As a part-time investor, I know that I am only likely to have a few good ideas in any given year. That’s ok, as long as those ideas earn me 20% or more on an annualized basis. Fortunately, by concentrating my money in those few investments, I don’t have to find very many. One or two picks a year is all I need.

It is focus that makes you rich, diversification just forces you to purchase some bad investments in the hope of finding a few good ones.

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