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mikecart1 (98.86)

How To REALLY Find If You are REALLY Diversified....

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August 17, 2009 – Comments (9) | RELATED TICKERS: BAC , ATVI , X

So it is one of those "golden rules" to investing smart - diversification.  You hear it all the time everywhere.  Even Jim Cramer who many serious investors don't like, will say it and have many agree with him.  Well most people with exception to Warren Buffet.  This isn't about Jim or Warren but me and you.  Well apparently I was diversified based on the true definition.  But when the market tanks 200 points in a single day, you really find out if you are or not.  Without naming individual stocks to my portfolio, I will name their general sectors and show you that diversification doesn't always work:

Gaming/Entertainment: -2%

Banking: -4.3%

Oil/Gas: -3.0%

Alcohol/Tobacco: -2.0%

Mortgage: -11.2%

Steel: -7%

So where exactly does diversification help?  I am losing on my top picks in my portfolio and every stock in the portfolio is negative.  I find it hard for someone to say that my picks overlap with one another.  Hmmmmmm....

Maybe Warren Buffet was right all along "Wide diversification is only required when investors do not understand what they are doing"

DISCUSS :)

9 Comments – Post Your Own

#1) On August 17, 2009 at 10:12 AM, outoffocus (23.18) wrote:

I would assume true diversification would involve multiple asset classes like stocks, bonds, and commodities instead of just stocks.

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#2) On August 17, 2009 at 10:18 AM, mikecart1 (98.86) wrote:

#1, ok well how come the 10 Yr Bond% Yield dropped also today?  I also got investments in MMA and they are still paying but dropping in their payouts monthly.  I think diversification doesn't do a whole lot when the market tanks, which is what the experts say it is supposed to protect for.

Maybe someone else can explain this?

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#3) On August 17, 2009 at 10:47 AM, mustbepatient (29.48) wrote:

mike, investors are willing to accept a lower yield on bonds today, which means that the value of everyone's bonds rose in value.

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#4) On August 17, 2009 at 10:50 AM, mikecart1 (98.86) wrote:

#3, oh.  Well I guess I must be patient ;)

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#5) On August 17, 2009 at 11:43 AM, millionby24 (< 20) wrote:

diversification means u gotta be short some stuff also..

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#6) On August 17, 2009 at 1:11 PM, mikecart1 (98.86) wrote:

#5, I don't think you got to short also to be diversified.  That is like saying you also need to play options, margins, short, long, and also hold bonds, cd's, etc. all at the same time.  Diversification from what I thought was mainly for longing stocks.

Shorting from what I've seen will destroy you and everything in your path lol.

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#7) On August 17, 2009 at 7:28 PM, SnapDave (63.54) wrote:

Indeed, it should be looked at as gov bonds are up today.  If you were holding them they are now worth more.  

I'd agree that shorting should be excluded or de-emphasized from the diversification equation.  If you could construct a portfolio that was perfectly diversified somehow, both long and short, it seems then that the outcome would be zero gain and zero loss over time.  Or if you were equally weighted long and short you would lose money over the long term.

Mike said, "I think diversification doesn't do a whole lot when the market tanks, which is what the experts say it is supposed to protect for."

I think that almost hits the nail on the head, except that diversification last year would protect you from the worse fate of being concentrated in Citibank, Bear Stearns or homebuilders.  

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#8) On August 17, 2009 at 8:06 PM, Seano67 (26.88) wrote:

Maybe Warren Buffet was right all along "Wide diversification is only required when investors do not understand what they are doing"

 

I agree with Mr. Buffett's quote regarding this, and in fact I've kind of been in the process of shrinking the number of holdings in my portfolio as well over the past month or so. I mean if you've only got a limited base of capital with which to work in the first place, to me it seems almost intuitive that your payoff might be substantially greater if you concentrate that limited base in just a few stocks (that you *know* or strongly, strongly believe are going to do well in the long term) as opposed to having that limited capital spread around in little piddling amounts all over the place and would take multiple decades to grow.

I see it as being sort of similar to the concept of going 'all-in' in poker, in that your risk is obviously greatly magnified in doing that, but so is your potential reward.  And I'm not about to do that anyway, go all-in on any one stock, as that drastically exceeds my level of risk tolerance. But what I am doing is shrinking my portfolio down from around 20 holdings to ultimately less than 10, and those 10 or less will be the ones I'll concentrate my limited capital resources into.

I wish I had the capital available to be truly diversified across as many sectors as possible just as a strategy of minimizing risk as much as possible, but then again I saw last Sept.-Oct. that didn't exactly work either. 

Some other very famous investor (Grantham, Siegal?) other than Buffett said the exact same thing about diversification, that your best shot to hit it big lies *not* in diversification but rather in concentration of your available resources, but I can't remember who that was right now.

Anyway, that's my .02.

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#9) On August 17, 2009 at 8:46 PM, mikecart1 (98.86) wrote:

#7, agree.  But no one here I don't think can say my portfolio today is not diversified.  Each stock is so far from the others it is unbelievable.  It is scary because a few more days like today and I'm wiped out.  So much for diversification. I wound up losing almost 7% of my entire portfolio today in terms of absolute value.

#8, I try to stay under 10 stocks and I do. Not just for concentration purposes but to avoid having to pay a bunch of commission that is unnecessary.  

Yeah last Sep-Oct, diversification got owned.  It is like finding out 2+2 = 5 and not 4.

 

 

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