Diversification Is For Amateurs

[sarahsays]

The latest (and last) Sophisticated Investor column from MarketWatch lists the five money management tips we can learn from the wealthy.

Number 2 is especially interesting.

2) Investing: Long-term growth may be the road to success, but you have to take risk to get rich. No guts, no blue chips, as they say. Concentrated, thoroughly researched positions will make you rich. Diversification, as money manager Marty Whitman -- a hall of fame investor in my mind -- says, "diversification is for amateurs."

 

[haha]

Diversification is for people who don't want to wake up some morning suddenly needing a job.

As for MJ Whitman, take a look at his 3rd Avenue Fund. Maybe he is an amateur, because this fund is widely diversified- though not like an index.

Ha

 

[W2R]

"Diversification is for amateurs"?

Uh huh...

After all, why spread risk when you can HAVE IT ALL!

 

[Marquette]

Well, I'm an amateur so I'll stay diversified.

I'd agree that a concentrated position is the only sure path to quick riches or quickly losing it all.... be sure it's all in naked puts as well. No sense saying you're going to go big and then not following through ;-)

 

[sarahsays]

Appropriate that it's his last column. If he really encourages Joe Schmoe to put all his money into "the next big thing" and not diversify, he shouldn't be writing an investment advice column!

I just thought the board would get a kick out of his ideas.

 

[runchman]

Put it all in Enron and grow to a fortune !

 

[Brat]

Frankly, in this situation, it is a complement to be an amateur. Amateurs are too busy with the important things in life and know, statistically, a diversified equity portfolio provides more wealth than one managed in this fashion. Just like poker players, a few can do quite well over the years but most loose it all.

 

[lazygood4nothinbum]

i don't care about being rich, but i don't mind not being poor.

 

[Marquette]

In one sense, the article is spot-on. If you start a business, you don't diversify into starting a hundred small businesses, you pour yourself into that one. If it hits, ala Google or Microsoft, then that's the fastest way to wealth. If it doesn't, well, there's always the next idea.

 

[Rich_by_the_Bay]

At age 59 and counting, I figure I just want my fair share.

I'll stick with diversification.

 

[Milton]

The problem with tip number 2 is not that it's wrong, but that it assumes the majority of investors want to be "rich". Most of us on this board just want enough to be financially independent.

I guess a high-rolling hedge fund manager would be the epitome of a 'professional' investor. They certainly take big gambles on concentrated positions. But they are playing with other people's money, and have a built-in compensation incentive to speculate

FWIW, Warren Buffett certainly prefers a focused portfolio, but has repeatedly recommended that "know-nothing" (i.e., the vast majority of) investors stick to low-cost, diversified index funds.

I like his tip number 3:

Lifestyle. They may seem fancy, but just because homes and vacations are expensive doesn't mean they are better. The magic of all things wears off after a while. Buy a new sports car and after a month I'll bet you will find something to complain about. Being smart about how you live trumps ostentation and shows you have class. Go to old-moneyed Greenwich, Conn. and you'll find the richest people driving the most broken-down looking cars. Think smart; don't show off.

 

[donheff]

Warren Buffet said something like that but made clear that 99.999% of us are amateurs and belong in indexes. I think he would include most managed fund managers among the amateurs.

 

[Lsbcal]

That article shows why the Sophisticated Investor column should disappear.

 

[chinaco]

I am an amateur. I use it, and am proud of it... also very well off financially.

 

[d]

question: how many sophisticated investors read and take advice from the sophisticated investor column?

 

[Dawg52]

How much risk are early retirees willing to take? Some, but not a whole lot. Diversification is a must at this point of the game. I know I don't want to go back to work.

 

[Spanky]

This is one of those articles about "no risk - no gain". A concentrated bet can make you rich or poor, and diversification will provide market (or average) return. I choose the latter.

 

[Rivrider]

My brother and SIL put all their money in Worldcom. Ended up selling for $100. Their retirement is on hold. I'll give them credit for not whining though.

I think I'll stick with being an amateur.

 

[RockOn]

Is there such a thing as too much diversification? Such as the highly diversified non-correlated portfolios containing every asset under the sun. Are the risks so balanced out that the returns will be lower because of the lower risk?

 

[haha]

Back to Martin Whitman again. He is a very successful investor, but his judgment is no more certain than ours is. He rode a big holding in Ambac (ABK) to above $90- then watched it decline to today's close under $3. All the while saying what a safe and sound investment is was.

So I think some diversification is in order, at least it is for me!

Ha

 

[packrat44]

"Diversification is for amateurs".


And Marty's point is ........?

 

[DroopyDog]

Well, if the definition of amateur is someone who doesn't get paid for what they do, then he's probably right. I'd be more willing to take risks if I was being paid a lot to do it .

Any idea what kind of compensation scheme these fund managers get? Do they make more when their fund does well?

 

[Milton]

Any idea what kind of compensation scheme these fund managers get? Do they make more when their fund does well?

See generally Michael Edesess, The Big Investment Lie (2007).

 

[StJohnsWood]

I amazed at the backlash from that comment. It was an opinion. Don't take it personal. I'm an amateur and I diversify. I'm proud of it. Some people get paid to pick stocks and they do not have to diversify if they do not want to. Some amateurs do not have to diversify. Whatever floats your boat!

 

[REWahoo]

I'd be more willing to take risks if I was being paid a lot to do it .

Especially if I was risking someone else's money...