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DIVERSIFICATION ?......Really

edited October 2014 in Off-Topic
Something stolen (borrowed) from moringstar chat and Warren Buffett: but something I ALWAYS believed in:

" if you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices-the businesses he understands best and that present the least risk, along with the greatest profit potential." WB

ALL dummies please see Indexing funds.....for your investing pleasure...

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Comments

  • Tampabay, you bring up a valid point, but how many WB's do you find hanging at MFO?
    Should one be buying Berkshier Hathaway ?
    Derf
  • The user and all related content has been deleted.
  • MJG
    edited October 2014
    Hi Guys,

    Rather a harsh judgment that Index investors, many of whom are institutional agencies, are dummies. There's some relief given the assessment could have escalated from dummies to idiots.

    I admire and cherish the rugged investor who is so sure of his decisions that he is confident in assembling a highly focused portfolio. More power to him. He does a great market service in promoting price discovery. Not all of us are so sure of our rightness.

    Concentrated portfolios are high risk adventures. Pick any fund manager you trust and examine his holding numbers. Typically he diversifies. Peter Lynch held hundreds of positions; Fidelity superstars Will Danoff and Joel Tillinghast do likewise. Buffett is a rare exception.

    Posting Buffett's quote is fair; the closing pejorative is not. Besides, the quote goes back to an older Buffett wisdom. More recently he said: " My advice to the trustee could not be more simple: Put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund (I suggest Vanguard's)." This quote comes from his 2013 shareholder letter.

    Study after study concludes that active investors do not achieve Index equivalent rewards. Over the last 20 years, something like 70 to 80% of active funds have underperformed Indices. DALBAR documents significant individual investor shortfalls relative to Indices year after year. A recent updated Vanguard study, "The Case for Index Fund Investing", which I Linked a few days ago, reinforces these consistent findings.

    It must feel terrific to be at the apex of the investing pyramid. The rewards must be astonding. But only a select few reach that elite position. Maintaining that high position over time is also a dubious task. My investing record clearly demonstrates that I'm not among that elite group, so part of my portfolio goes into Index products.

    I doubt that that decision qualifies me as a dummie. But everyone is free to express their own opinions and biases.

    Best Regards.
  • It must feel terrific to be at the apex of the investing pyramid. The rewards must be astonding. But only a select few reach that elite position.
    MJG,

    Meet Tampabay. You should honored to be in his presence. He will teach you how to invest in 20% to 30% of active funds that that beat the indices. You will graduate from being a dummy and live happily ever after.

    Mona
  • Some of us have finance degrees, and some don't My nephew is studying that stuff. I GUESS it'd be a helluva lot more interesting than accounting. Discussions about the Big Macro Picture must be lots more stimulating than to count-up line items on a sheet. Nevertheless, both serve a valid purpose. Because dummies like me can't balance our chequebooks.

    And as Steve Martin is known to have said: "Some people have a way with words, and some people... have...not...way.
  • If this is the same Tampabay from another site, we will learn much from him. His wisdom was so great, his picks were so right on, his forecasts so sharp, it was uncanny.
  • Sing that song Dennis, your #1
    People (investors) don't understand when Buffett tells people to invest in Index funds"
    He is saying you are not smart enough to pick out companies like JNJ, PG, Pep, ect ect. and to carry it farther your not smart enough to know a good fund manager from a poor fund manager. So Does Buffett have you pegged or not?
  • edited October 2014
    Tampabay said:


    " if you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you.

    I'm a big fan of WB. Don't know when he said that. I suspect it was a long time ago. I certainly don't think he would advise that to people today. Just this year I have heard him advise on more than one occasion, don't have the exact words, but certainly strongly suggest that most investors would be far better off in an S&P 500 index fund, and be done with it.

    Why did he put in his will to have his wife's portfolio invested 90% in the S&P 500 index fund and 10% in short term government bonds? If he believed the above, would he not have named a stock picker to pick "five to ten sensibly priced companies"?

    Jim Cramer advises to pick five to ten companies, no more, no less. 20% of your portfolio in one stock is that not a gamble? Even Buffett has made some significant errors in picking stocks. If you do that with a 20% position.........

    "if you are a know-something investor, able to understand business economics" : there are thousands of mutual fund managers who can't beat an index fund over a longer time frame. Certainly they "know something", and are "able to understand business economics". They still can't beat an index fund on a consistent basis.

    Just don't see Warren Buffett, or Charlie Munger, advising investors to pick five to ten stocks, rather than what I think, correct me if I am wrong, is their consistent message to just buy a low cost index fund.

    What I think is his quite controversial position, is to have an asset allocation of 90% S&P 500 index fund and 10% short term government bonds. Buffett is NOT a fan of bonds! He seems to be quite consistent with his position on fixed income also.
  • I think we may be foucusing on wrong things. First i think it is genrerally accepted that over 20 stocks it becomes diworsification. Second a monkey - no disrespect - can index. Most monkeys - disrespect cannot manage a portfolio.

    It think most active managers who know what the are doing will agree that dont want to invest in too many atocks but only their best ideas. Very few can get away with it in the real world. Tahy will either not be able to market their fund, or they will have more assets that can move stocks if they only use a few which may notbe desirable.

    Plus i am sure their are many other practical and necessary conditions for bothivestors and managers. I think it is time we stopped this debate. I am not seein the point of this day in and day out. If nothing else, let financial pron work a little harder and cone up with soething more useful to debate. This topic has become the "who killed marilyn monroe" topic on tv. How long will we keep wasting our time?
  • Second a monkey - no disrespect - can index
    Precisely and the beauty is 70 to 80% of active funds have underperformed Indices. While you think that is the wrong focus, I think it is the right one.
  • Hi Tampa Bay!
    As an investor, I do not understand business economics. That is why I own funds. Long term advantage can be lost in a hurry with poor management at the helm. The competition can catch your new product in a hurry today. As for less funds, the better....yes, I agree. Am doing so now. Indexing I think is a good thing....am using it more. The funds I have, such as healthcare, afford me access to the sector because of change happening so fast. 1 or 2 companies could be left behind quickly. So I want many in an overweight area for that reason. The Index is something I can't seem to ever beat, so at least I know what I am now. If you could put up some examples, I would appreciate that. Or, if you could share some pointers on what to own now regarding your portfolio, that would be helpful as I have some cash.
    the Pudd
  • As Buffett would say and a reasonable investor would follow if you don't want to invest in your 20th best Idea, then you invest in YOUR own Best ideas, Index investing Makes you invest in some of the worst companies in America, That is why I don't own them, but I will confess to owning ETFs, a mild form of index investing that offers other advantages the funds Don't.... thus I compromise for the best performers with little management.

    What I own Vs. S&P, for specifics (individual investments) you have to ask Mona, she won't let me announce on public air waves..

    Cyclical 18.20 30.39
    Basic Materials 0.98 3.30
    Consumer Cyclical 7.72 10.22
    Financial Services 9.45 14.95
    Real Estate 0.04 1.92

    Sensitive 23.55 42.78
    Communication Services 11.26 4.03
    Energy 2.60 9.70
    Industrials 3.35 11.02
    Technology 6.34 18.02

    Defensive 58.26 26.83
    Consumer Defensive 28.45 9.52
    Healthcare 28.77 14.32
    Utilities 1.04 3.00

    Not Classified 0.00 0.00

    Note: Healthcare, consumer defensive,Communications...the majority...I think 70+%
  • Hi Tampa Bay!
    By sensitive, my guess is interest rate. If not, please advise. From what I see, you are playing defense. May I ask why? And, for how long? Where do you think we are in the market cycle: mid-, or late-? Also, how often do you adjust your portfolio? As for me, also overweight healthcare and energy. As for what I see: sunshine and blue skies in the future as things keep getting better. Mona---some tidbits, please.
    the Pudd
  • Defense? I feel getting heavily loaded in healthcare a few years back, was one of the most aggressive investment decisions I have ever made, and the rewards have been substantial. Moving forward:consumers need food,health , staple goods and communication services no matter what the economy brings. So if that is Defense..... I'm "all in".
    I would/could "adjust" my portfolio Daily if I felt the need, but last few years just adding to "Good buys" and riding the waves. Withdraw times coming....
  • Tampabay said:

    Moving forward:consumers need food,health , staple goods and communication services no matter what the economy brings.

    I'm the same way. Focus on needs over wants.
  • Mona said:

    Second a monkey - no disrespect - can index
    Precisely and the beauty is 70 to 80% of active funds have underperformed Indices. While you think that is the wrong focus, I think it is the right one.
    Sorry, but i think you are missing my point. Everyone knows most active managers are not worth it. Right? What is the point belaboring it?
  • Let me ask IF 70-80% of fund managers "underperform Indices"
    Does that mean 20-30% of managers outperform indices? Just wondering
    How many funds can you buy?
    I'm sticking with my outperforming managers, labor and all.....
  • I don't think Warren's following his own advice because he has outright purchased more companies than 20 and he has a large number of reportable minority holdings as well. On the extremes of no diversification are many small business owners who have their entire life savings wrapped up in their business. For the ones I know, its not easy but they love what they do and they wouldn't give that up for anything. On the other hand, I had plenty of colleagues who put their money in index funds, paid little or no attention and spent their lives doing the non-investing things that made them happy. In my mind, anyone who's chosen an approach that makes them comfortable and happy is one of the smartest people around, regardless of what that approach might be!
  • Warren Buffett would never buy ANY mutual Funds, but he's going to buy his wife index funds for when he croaks, does that tell you anything about his investment choices and what he thinks about other people (including his Wife) abilities to invest money?
  • Of course Warren would never buy a mutual fund. He's essentially the largest mutual fund on the planet all by himself and his expense ratio is probably better than most Vanguard index funds. He has his own managers that he hires away from hedge funds to take care of a few billion $ of the "portfolio" and he ranks something like first in his category over the last 50 years.

    I think his thoughts on index funds are more about human nature than anything else. His success is based in part on his ability to be greedy when others are fearful and fearful when others are greedy. No matter how much we might all like to be that way, Warren is better and his deepest of the deep pockets make that a lot easier.

    I keep wondering, when we all talk about a large portion of fund managers underperforming, how many managers would outperform after adding their management fee back to their returns. If the underperformers are still a big number even after adding back their pay, then index funds look even better. But if many managers outperform on their investments and underperform because of what they get paid, then its a different question.
  • @ LLJB - "His success is based in part on his ability to be greedy when others are fearful and fearful when others are greedy. No matter how much we might all like to be that way, Warren is better and his deepest of the deep pockets make that a lot easier."

    In mant respects I think that's pounding the nail on the head. Mr. Buffett has the "RESOURCES" to do what he wants to do when he wants or is afforded the opportunity(ies) to do so. Your average mom & pop investor doesn't have the kind of cushion that will support them if they are wrong so they have to play it safer.
  • Do you think Buffett ALWAYS had the Resources?, If I remember correct he use to collect Coke bottles sell them and buy stocks. Mom & Pop can do that too...no excuses!
  • Sure thing, Ayn.
  • @ TB - Honestly!? My comment was in reference to investing during times of trouble. How many moms & pops will throw money into the fire during the next market beat down? Buffett has the resources and the smarts to do so. Other's? well their mileage may vary. But day-to-day investing? Yeah, they can do that, including pop bottle money.
  • Repeat: NO excuses!
  • To be clear here, Buffett was not poor in any sense, he used common sense to accumulate money. Every kid back then did the same thing.
  • "EVERY KID" ?what no idiots?, or could "care less" kids about earning money? boy that was a hell of an era, most of my friends growing up didn't have a clue about MAKING money and NO common sense...their excuse was.....ok I don't know.....
  • Howdy folks,

    Can't disagree with TB or many of the others. If you want to make the most money you don't diversify but concentrate your investments. If you want safety you do diversify. As with most black and white choices, the answer is somewhere gray in between. You want to maximize your return while not being too risky. Not too many people are willing to 'bet it all' on a few stocks. Many of us nibble around the edges.

    Most investors don't have the time nor aptitude nor desire to actively manage their portfolios. The industry tells them to just cover the squares and it'll all be good in the long run. Ergo, index funds. Ideal passive investment that will probably work to a degree IFF your long run is long enough. You will probably approximate the long run market returns. Now lets put on our way back hats and remember that this is all because the market is efficient and always reverts to the mean . . . again, in the long run.

    Ah, but in the short run, the market is anything but efficient and can remain inefficient for years - before reverting to the mean. First, this provides a window of opportunity to actively manage your portfolio to take advantage of the abnormalities in the market. This led me to momentum investing where I would simply overweight (to a greater or lesser degree) whatever sector/segment/region was outperforming the overall market. It was never an all or nothing bet - just overweighting the outperforming areas - but it permitted me to beat the averages and that was my goal. However, this does require time and effort and study and the vast majority of people don't want to bother.

    Second, because the market can remain inefficient for years before 'reverting to mean', means that you might not live that long depending upon your age. This is where passive index type investing can really hurt you. Assurances from the industry that we should set tight and it will recover are hollow promises when you're in your later years. You don't have no steeenking long term to recover.

    and so it goes,

    peace,

    rono
  • edited October 2014
    Yup. No risk no reward. And if you are lucky to have a life span and investing years during that lifespan that perfectly aligns with historical charting touted by the financial press, then sure, go ahead and invest for the "long term".

    It does not even matter whether you index or not. Sorry to harp, but when vs what. I don't think most people accept that. You are investing actively fine, just don't fall in love with your fund. Yours truly was guilty of it, but grew out of it. Sure I have opinions on funds, but that no longer does it keep me in my fund just because.

    I've also made another point before. WWWFX vs VFINX. M* called this the worst fund. Then at some point they grew silent. Why? Look at the chart of this fund since inception against the S&P 500 at M* no less. Think of those people who bought the fund at inception and then those who bought at the peak.

    I'm sure M* will have something to say about WWWFX again but only after it will drop 80% again, not otherwise. But never mind that. What really is distressing is that MFO will not recognize WWWFX as a mutual fund symbol.
  • beebee
    edited October 2014

    What really is distressing is that MFO will not recognize WWWFX as a mutual fund symbol.

    Just unlucky I guess...KINAX and KINCX are brethen funds. Still WWWFX is the only no load and has the lowest ER of all three. Maybe a technical question ito Chip is in order.

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