Quote:
Originally Posted by Undertoad
Lynch's strategy makes sense, ... But this handful of stocks has a problem: they are all in one sector, technology. If you had looked at a different time frame, say the time frame ending in the dot-com bust (to be a little too obvious), they would all be dogs and you'd underperform the funds.
|
The dot.com crash hit everything. For example, Ford and big pharma also suffered. How are autos affected by computers? Well major downturns tend to take all down. Whereas the downturn was larger among the dot.coms, still the downturn was mostly with stocks not on my list. Notice how those stocks mostly followed the DJIA down meaning most all stocks took a hit.
Viewing aimeecc's three stocks demonstrates the problem. J&J, Intel, and a bank was a diversified portfolio and a prescription for failure. A typical and diversified investor would not understand all those industries and their products. Bad news is to invest in industries not understood; which was the point in Portfolio 101. Investing without grasping the product is why one should invest in one stock in his early twenties so as to learn the 'feel' of how it works; to learn using money that is most precious. I believe most everyone loses on their first investment - which is necessary to understand investing by 30. aimeecc's other mistake was to ignore those investments - not learn from them. We make mistakes to learn.
Peter Lynch talks about investing in things he understands such as retail that his daughters and wife preferred shopping at. Warren Buffet makes the same point. Buffet's closest friend, Bill Gates, repeatedly tried to explain the computer technology. Warren refused to invest. Buffet is another famous investor who invests only in what he understands such as MacDonalds, Dairy Queen, Coke, a railroad, etc.
aimeecc violated principles in
Portfolio 101 and
Portfolio 101. Intel was a very bad investment if the computer industry was not understood. Bank of NY also a poor investment for same reasons. Even if one hits the lottery does not make it a good investment. The good investment is not about luck.
Big and famous name is not sufficient to judge a good stock. Using that strategy means GM is an ideal investment. After all, see all those GM cars? Learn the failure of that reasoning as demonstrated by GM's stock for the past 20 years. GM products have been that bad that long. One cannot invest using a product oriented perspective if the company and its products are not understood.
Diversification is overrated. Yes, if one can diversify, then by all means do so. I also understand cars - so I can diversify. But back then, I saw no good auto investments. If diversification means investing in industries not understood, then diversification would only pervert the investment. If one needs diversification, that means index funds and ETFs. Those are the only way to diversify and not get punished because the investor does not understand each company’s products.
One previously forgotten point: returns did not include another profit - dividends. Most of those examples did not have dividends. But those few dividends actually pay the rent.
To be diversified, one must first learn about other industries. Being diversified in other 'unknown' industries is how to lose. Meanwhile, notice how all those stock in one industry - when one was down, another was up big time. Even though all were in a same industry, all did not rise and fall together. Being in various aspects of the same industry was diversification.