surely it’s better to have a more diverse portofloio though?
So owning a bit of gold, productive businesses, bonds etc… ?
surely it’s better to have a more diverse portofloio though?
Diversification is protection against ignorance, if you know what you are doing, you do not need to diversify. If you don’t know what you are doing, you need to diversify. My 3 biggest holdings are Square, Apple and Visa. Nearly half my money is in these companies. This is how you beat the market, concentrate on top companies with a wide economic moat and stickiness around their business.
But I’d rather own the productive businesses over bonds or gold. Bonds are only good if interest rates rise substantially, to say around 6-7% on the risk-free rate in the US. Stocks are better now, since interest rates are low.
Personally I don’t have any gold exposure. It’s popular when people are worried about even bonds/gilts.
I go for ETFs/Funds to cover the mass market, have a small selection of stock picks, and finally some bond/gilts to round out any expected volatility and to have some more “reliable” income.
You want to find the right stocks, at the right price and then swing for the fences. You don’t go half in or a quarter in or hold an index fund if you know what you are doing. If I find a wonderful business at a fair price, I’m going to put a lot of my wealth into it.
For the benefit of anyone new & to keep the discussion balanced, please remember that these companies may not do as well as Harihar is hoping.
I agree, and it is a very valid point to mention that. I DO NOT recommend you buy those companies, I’m just saying 50% of my wealth is in them.
makes sense, i’m a massive fan of Jack Dorsey, would’ve liked to invested in Sqaure but i feel like it’s too late. I’ve been reading that Stripe might IPO, which would be great news/
I don’t think it is ever too late to invest in a company, it’s better to invest now than later. As a company matures, its EPS growth rate drops and stock price returns drop. I like Square because of its stickiness, it’s a bit like Apple, so many competitors but everyone wants to go with Square.
The valuation is an issue with Square and that is worth keeping in mind, it’s a long term hold for me either way. As always, do your own research with any investment, including Square.
You want to buy the superstars of tomorrow when they are young. Big companies can grow, but at a much slower pace.For Apple to double to a 2 trillion market cap is much harder than Square to double to a 60 billion market cap. However, smaller companies come with a lot more risk and capital can be destroyed very easily paying too high a price for earnings which never materialise.
Well Harihar doesn’t do that, but many others have had success doing exactly that.
As I think Harihar says in a different thread, novices might be better off with index funds. But we might extend that advice to “most investors” since the evidence (eg Spiva) suggests that it is very hard to reliably outperform the market or even select an expert to do it for you.
ie: many investors have enough time that “beating the market” isn’t a goal they need aim for or risk they need bear.
When you look at the companies that are IPOing right now (Slack, AirBnB, Pinterest), surely these are the companies that can double in market cap, at the same time some are over inflated (Lyft, SnapChat) have all fallen heavily.
Many managers have outperformed, Peter Lynch, Warren Buffett etc. If you know what you are doing, it is likely you will outperform to some extent, even if that extent is a few percentage points a year.
By simply holding quality businesses at fair prices, means you will outperform the index, which is full of mediocre businesses at most, and a few quality and poor businesses.
Apple has outperformed the S&P 500, so have Visa, so has Square.
Everything comes down to valuation and the ability to drive future earnings. I would need to look at financials first, I want companies which can grow revenues year on year in double digits. I also want companies which can consistently do that. I like companies which have recurring streams of revenue. I like companies which have a moat around them, keeping the competition away.
In my personal opinion investing in the IPOs seems illogical especially from a new investor perspective. The majority of the companies are loss making and show no signs of being profitable, won’t provide a stable dividend and are a huge gamble on the future. As a new investor I would suggest diversifying in companies you know and understand and branch out into sectors once you get to learn the market
Diversification is protection against the impossibility of knowing the future. You do not know how Square, Apple and Visa are going to do in the future.
You hope their returns will be above market average. You’re understanding of these companies has led you to believe above average earnings should occur.
Your understanding based on current and past financial figures may be correct, and your hope may be justified.
But tomorrow Square could collapse, having had its market stolen by Apple. Apple could eat Visa. And then Apple could lose its edge. All perhaps unlikely for these extremes to occur, but possible. It’s much more likely that they simply start underperforming, even whilst staying in business.
How much money you stand to earn from your investment depends on the price you pay for it. It’s certainly possible to be late to an investment frenzy where the price has been driven up, such that you can only hope to earn a pitiful percentage over the next 5 to 10 years.
It doesn’t matter how great and successful and unchallenged a company is. If you overpay for its stock, you’ll underperform the market average.
A fantastic book I can really recommend in terms of diversification is How to Own the World, you can get it here:
Really useful information, well-written and concise.
Great points there, but you need to make the distinction between overpaying for a poor company and overpaying for a good company. You can very well overpay for a good company and come out ok, however, overpaying for a poor company will lead to massive destruction in capital.
The most important thing is the ability of a business to generate and grow earnings, everything else is secondary. You could have bought Apple at the 2007 peak, had half your investment cut in half, only to see it go up ten fold over the next 12 years (not including dividend reinvestment).
If it helps, Google IPO’d in 2004 with a P/E of 70. So buying Google was very risky then, at $24 a share after adjusting for splits. But it was profitable, even at IPO.
I’ll take a much more simple approach to answering your question.
I would diversify your portfolio unless you have experience of losing money and then protecting against losing money. Very few people pick winners from the start so don’t be afraid of it.
In terms of what you diversify into, I doubt anybody can help you - only you know your risk appetite. A split between common stocks and government bonds is as strong as you’re going to get. Gold will protect you against inflation, again only you can decide if inflation is worth protecting against at this time
I will also mention one last thing…the equity risk premium
Equities (also known as stocks) demand a higher return than every asset class because they are riskier. If you can’t handle the down days in stocks (there will be many, and they will occur till judgement day), then you have no place buying stocks. Then I recommend sticking to bonds, where you know what you are getting and the only risk is default of the issuer.
A lot of people emotionally can’t handle losing money (even if its a paper loss), they have no place in stocks then. If you can watch your entire portfolio drop 50% from top to bottom and be tempted to sell after the 50% drop, you should not be in stocks. If paper losses are causing sleepless nights, your equity risk is too high.
If you sat through December 2018, where we had a violent sell off and didn’t sell anything, but added more to your good oversold positions, then you should be in stocks.