I have been thinking to start a thread to keep note of my thoughts on investing. Better late than never,Trigger came in the form of this article.
“Batista has since watchedhis $34 billion net worth plummet some $33 billionover 16 months or so, according to Bloomberg. The big problem? His oil conglomerate, OGX Petroleo & Gas Participacoes SA, lost90 percent of its value over the last year, leaving Batista with a relatively paltry$200 million when including debtshe owes to investors.”
flash back by 16 months:
“Brazilian oil tycoon Eike Batista, who last year was quite literally on top of the world. Life was good, he was eighth richest man on the planet, and once he evenvowed to overtake Mexicoas Carlos Slim as the planet’s richest man.”
Do we tend to become over optimist when things are going good ?
Of late, am having serious debates in my mind about portfolio concentration Vs diversification.
When one is a industrialist like Batista, there might be very few options left to diversify a 34$ Bn oil empire in a short time. But as an individual investor, do i really need to take risks like a industrialist ?
In other words, do i really need to have really high allocation to just 1-2 company ?
Can I really draw inspiration from Buffett’s investment on Amex in this context ?
Not sure, because for 1 Buffett there could be thousand “muppets” about whom I don’t know much.
Popular argument in for of concentration is lack of time to follow many companies (fair enough), chance to double portfolio every 2-3 years. But what’s the down side ?
Corollary to that is, with diversification we can only get mediocre returns or slightly better returns than market ? But even if we get a consistent return of 18%, money can grow by ~28 times in 20 years !!! (We are an economy growing by 5% with a inflation of 8-9%, so 18% doesn’t look very tough to me even now - But it’s debatale)
I am working out a rule for myself, no more than 10% allocation to a single stock (at cost). That too only when the conviction+under valuation combine and present the rare opportunity.
10% is not a magical or scientific number. Just a round & comforting figure. If a single bet were to go as bad as batista’s fortune (ever) , will only set my overall equity portfolio back by only 9%.
Excluding the house i live in & gold for personal consumption, a significant portion of my networth is invested in equities. So, the thought process kind of reflects that position. If i were investing just say 10-20% of my networth into equities, may be i would have thought differently.