Tags
blogging, diversification, fear and greed, Margin of Safety, portfolio allocation, size effect, value investing, Warren Buffett
Continued from here.
vii) ‘Sorry, I don’t have any sure-fire winners’
Do I feel confident about my portfolio? Yes, I do…
But with an important caveat: I feel long-term confident. I’d even dare to say I expect to out-perform my benchmark indices. [Well, another caveat: That’s really not my objective – I’m more focused on absolute returns & generally improving my risk-reward ratio].
But do I feel confident about my individual stock picks? No, not necessarily…
Unfortunately, this is a reality we all face as investors. No matter how diligent your research, no matter how rigorous your quantitative & qualitative analysis – all too often, individual stocks feel just like a roll of the dice. Most obviously, the insidious effects of fear & greed are to blame – but no matter how hard you stamp these out, you’re still subject to the tender mercies of Lady Luck. And there’s no escaping her. [Though it helps if she looks like this…] As any good boxer will tell you: If you box, you will get hit… The sooner you resign yourself to rolling with the punches, the better – but don’t forget, the best boxer (usually) wins in the end.
And over time, investing skill & experience will inevitably beat luck, while diversification is also your ultimate secret weapon. Sure, I confirm my portfolio allocation for each stock I write-up – and that’s a great indicator of my confidence level – but the real lesson I preach is diversification, not concentration. Imposing relatively mechanical limits within your portfolio (see Well, Are You The Right Size?) is a great way to remove emotion from the equation. [Over the years, I’ve homed in on 3-7.5% as an optimal allocation for a single stock, in a portfolio of 15-20 (core) holdings]. As any smart investor will tell you, they’re usually confounded by their portfolio winners & losers in any one performance period. And trying to predict (or buy) just a few top picks is a fool’s game. So, no matter how confident you are, you still need to spread your bets…
viii) ‘I’m sorry it’s a micro-cap, and you hate the price & spread’
Well, really, I’m not…