Platitudes like real estate must be a good investment because "they aren't making any more land," or healthcare must be a good sector to invest in "because boomers are aging" or Coca-Cola must be a good investment because "I personally know
Coke tastes better than Pepsi"... are worthless. The idea that "great" blue-chip companies are safe investments is wrong. What would you have said about GE in the late 1990s? Wouldn't you have said they were the safest investment in the world, a great company, globally diversified, and diversified in its businesses, thirty different business units, each one of the top three in its category, and widely view as one of the best managed companies in the world? If you can prove that you wrote down a note in 1999
saying "I think it would be foolish to invest in GE over the next decade," then I will acknowledge that you are an investing genius and I'll seriously consider buying some Kraft or Whole Foods stock.
From John C. Bogle, Clash of the Cultures
, 10 Rules of Investing:
#5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.
From Larry Swedroe, The Quest for Alpha
, Rules for Prudent Investing:
#17. Owning individual stocks and sector funds is more akin to speculating, not investing. The market compensates investors for risks that cannot be diversified away, like the risk of investing in stocks versus bonds. Investors shouldn't expect compensation for diversifiable risk--the unique risks related to owning one stock, or sector, or country fund. Prudent investors only accept risk for which they are compensated with higher expected returns....
#19. Before acting on seemingly valuable information, ask yourself why you believe that information is not already incorporated into prices. Only incremental insight has value. Capturing incremental insight is difficult because there are so many smart, highly motiivated analysts doing the same research. If you hear recommendations on CNBC or from your broker or read them in Barron's, the market already knows the information it is based on. It has no value.
From William J. Bernstein, The 15-Stock Diversification Myth
So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.