Page 399 - How to Make Money in Stocks Trilogy

274 BE SMART FROM THE START

any field, including investing. Did all the esoteric derivatives help or harm
Wall Street pros? Did experimenting with highly abnormal leverage of 50 or
100 to 1 help or hurt them?
Would you go to a dentist who did a little engineering or cabinetmaking
on the side and who, on weekends, wrote music and worked as an auto
mechanic, plumber, and accountant?
This is true of companies as well as people. The best example of diversi-
fication in the corporate world is the conglomerate. Most large conglomer-
ates do not do well. They’re too big, too inefficient, and too spread out over
too many businesses to focus effectively and grow profitably. Whatever hap-
pened to Jimmy Ling and Ling-Temco-Vought or to Gulf+Western Indus-
tries after the conglomerate craze of the late 1960s collapsed? Big business
and big government in America can both become inefficient, make many
mistakes, and create nearly as many big new problems as they hope to solve.
Do you remember when Mobil Oil diversified into the retail business by
acquiring Montgomery Ward, the struggling national department-store
chain, years ago? It never worked. Neither did Sears, Roebuck’s move into
financial services with the purchases of Dean Witter and Coldwell Banker,
or General Motors’s takeover of computer-services giant EDS, or hundreds
of other corporate diversification attempts. How many different businesses
and types of loans was New York’s Citigroup involved in from 2000 to 2008?
The more you diversify, the less you know about any one area. Many
investors overdiversify. The best results are usually achieved through con-
centration, by putting your eggs in a few baskets that you know well and
watching them very carefully. Did broad diversification protect your portfo-
lio in the 2000 break or in 2008? The more stocks you own, the slower you
may be to react and take selling action to raise sufficient cash when a serious
bear market begins, because of a false sense of security. When major market
tops occur, you should sell, get off margin if you use borrowed money, and
raise at least some cash. Otherwise, you’ll give back most of your gains.
The winning investor’s objective should be to have one or two big winners
rather than dozens of very small profits. It’s much better to have a number
of small losses and a few very big profits. Broad diversification is plainly and
simply often a hedge for ignorance. Did all the banks from 1997 to 2007 that
bought packages containing 5,000 widely diversified different real estate
loans that had the implied backing of the government and were labeled
triple A protect and grow their investments?
Most people with $20,000 to $200,000 to invest should consider limiting
themselves to four or five carefully chosen stocks they know and under-
stand. Once you own five stocks and a tempting situation comes along that
you want to buy, you should muster the discipline to sell your least attractive