| Why is it that some people only buy one
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| | no worse emotional low. The depression
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| or two stocks? Others may have 15 stocks
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| | can be almost unbelievable. There's also
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| but have 50 percent of their investment
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| | the issue of owning more than one type of
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| assets in just one of those 15 stocks. In
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| | investment. There are equity investments,
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| Wall Street we refer to this type of
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| | which are stocks. There are real estate
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| behavior as concentration. Some firms
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| | investments, and bond investments. There
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| call it over-concentration. When this
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| | are also venture capital investments,
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| happens in a brokerage firm it is always
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| | precious metals, and others such as oil
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| considered dangerous. It is so dangerous,
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| | and gas. To a large extent, you achieve
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| in fact, that if the brokerage firm is
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| | diversity in your investment strategies
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| using a concentrated stock position as
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| | by owning different types of investments,
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| capital, then the market value of the
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| | as well as investing in different
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| security in question is given a haircut.
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| | sectors. Let's go into a few real life
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| This means that the full market value of
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| | examples. We at believe we have already
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| the security is chopped by some fixed
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| | made the equivalent of a lifetime of
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| percentage in any capital computation. In
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| | investing mistakes, so learn from a few
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| other words, if you are
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| | of ours.Arrow Electronics It was
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| over-concentrated, you don't get full
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| | Christmas week in the early 1980's. One
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| value. Some of you may have margin
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| | of us was sitting at Bear Stearns as a
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| accounts. As you know, advocates cash
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| | limited partner at the time. We were
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| ownership of stocks. If you own stocks on
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| | doing very well as stockbrokers. It was
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| margin, it is our opinion that you will
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| | the period of full commissions (no
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| get sold out on margin. Normally in a
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| | discounting), and clients were doing
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| margin account you put up 50 percent of
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| | 10,000 share trades in $50 dollar stocks.
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| the value of the stock you acquire in
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| | Taking home an income of $500,000 to
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| cash. If equity falls below 35 percent,
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| | $1,000,000 in a year was no big deal at
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| you get a margin call. Now, brokerage
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| | the time. We were loaded up on Arrow
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| firms love it when clients have 15 or 20
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| | Electronics, a NYSE company in the
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| different stocks in a margin account. If
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| | semi-conductor sector. Business was
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| there are some bonds in that account,
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| | fantastic, the future was bright, and
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| guess what, they love it even more. Why?
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| | things could not have been better. Since
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| Because brokerage firms know that stocks
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| | we were involved on the banking side as
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| represent risky investments. Something
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| | well, we had an open line of
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| can always go wrong in any one situation.
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| | communication to the company. We knew we
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| Maybe something can go wrong in any two
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| | had a good thing going. The telephone
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| situations. It's tough to see something
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| | rang on one of those beautiful days prior
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| go wrong in 15 situations. That is the
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| | to Christmas when New York City is the
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| essence of diversification. SPREAD THE
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| | place to be, Rockefeller Center all lit
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| RISK AROUND. It makes a lot of sense.
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| | up with a 50 foot Christmas tree and all.
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| Some investors own 50 to 100 stocks. This
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| | "Hello." A harried response, "There's
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| is because they think they need that many
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| | been a fire at the Tarrytown Hilton
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| to achieve the investment goals that they
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| | Executive Center, a lot of people are
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| set out for themselves. In business
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| | dead." "Okay, that's terrible, how does
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| school at a master's degree level they
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| | it affect me and by the way, what's for
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| teach you that to achieve true
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| | lunch today?" "Buddy, you don't
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| diversification you need to own something
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| | understand," the dead pan voice says.
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| approaching 14 equity positions. It has
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| | "What don't I understand?" "The entire
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| been the experience of that 6 to 10
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| | executive leadership of Arrow Electronics
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| different equity positions is sufficient
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| | was in that fire." All of them, every one
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| to achieve diversification. The one thing
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| | of them had been killed by this monstrous
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| we know for sure is that it's not one
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| | tragedy. It was the worst Christmas
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| stock or two stocks. Own one or two and
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| | imaginable for the wonderful families of
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| you get killed.Putting all your eggs in
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| | this dedicated group of execs. The
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| one basket We advise all investors to own
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| | families never recovered, the company
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| several stocks and to own more than one
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| | never recovered in terms of the people
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| sector. Own more than one type of
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| | that were left, and the stock took years
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| investment (that means equities, bonds,
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| | to recover. It plummeted from $32 per
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| real estate, cash, you get the picture)
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| | share to $4 per share in a matter of
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| or you will have problems. Sectors refer
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| | days. The recovery was slow and hard, it
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| to stocks with broad themes. Examples
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| | was agony all the way back on this
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| are: * Energy * Semi-conductors * Housing
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| | particular stock. Arrow Electronics is an
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| * Auto * Consumer * Airlines * Personal
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| | example of putting all your eggs in one
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| Computers * Technology in general If you
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| | basket. It is an example of owning just
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| own 10 stocks, but they fall into only 2
| |
| | one stock. SAB does not care how much you
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| sectors then you really have not achieved
| |
| | know about a company, things can go wrong
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| diversity in your portfolio. You see,
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| | and do go wrong. You simply cannot own
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| when they come to get Ford Motor, usually
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| | just one company because the risk on the
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| General Motors is not that far behind. By
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| | downside is too great. YOU MUST DIVERSIFY
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| the way, it's great on the upside to own
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| | IN ORDER TO SPREAD THE RISK.Copyright
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| everything in one sector when that sector
| |
| | 2006 Richard StoyeckRichard Stoyeck is
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| is going your way. There's probably not a
| |
| | the publisher of Subscribers get award
|
| greater high in the world than when
| |
| | winning stock ideas from one of Americas
|
| everything you own is going up. On the
| |
| | premiere money managers. Extraodinary
|
| flip side, when you are overly
| |
| | track record has generated returns of
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| concentrated in a sector that's heading
| |
| | 36% per year for 6 years.
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| down, lower and lower every day, there is
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| |
|
