4 ms·

minimize? what does that mean, how much? and who recommends? where are these rules written you're talking about? usually people hold onto things they think are

by anon808 14y ago

minimize? what does that mean, how much? and who recommends? where are these rules written you're talking about? usually people hold onto things they think are valuable and sell those they don't. sometimes those that sell that which they don't think is valuable will use weasel words like 'diversification' and 'minimize exposure' to explain their actions so they don't have to admit they don't think what they're selling is very valuable.

marvin 14y ago
It's about decreasing risk and volatility. If you're an insider in Zynga or Facebook, you might have slightly more information than the stock market...but probably not a lot. You can't expect to out-guess the market considerably. All else being equal (in other words, unless you have information that the rest of the market does not), your expected return will be the same if you own one stock in a certain industry as if you own a lot of different stocks in the same industry. If you roll one dice, the average number of eyes is the same as if you average over 100 dice rolls...but the probability of ending up at the extreme end of the scale is much higher. This is why investors want to diversify. What is best, in practical terms, for an average person: getting a guaranteed 2 million dollars or having a 1 percent chance of getting 200 million dollars?
- anon808 14y ago
  "If you're an insider in Zynga or Facebook, you might have slightly more information than the stock market" What if you're the guy running the entire company? Will this mythical 'market' you keep referring to run your company better than you can?
  - marvin 14y ago
    That I have no idea about; you'd have to do a survey and get honest results from CEOs which have run companies that tanked. CEOs have much more insider information than "this mythical market", but I'm sure primary insiders have occasionally been blindsided by a crash in the stock value before it was obvious that anything was wrong with the company. Regardless, Pincus & co. will probably be investigated by the SEC after this. Illegal insider trading is punished very harshly.
stickfigure 14y ago
No matter how promising you think any particular stock or investment is, there's always a chance that you're wrong. Are you willing to play russian roulette with your entire net worth?
lotharbot 14y ago
> "usually people hold onto things they think are valuable and sell those they don't." Usually, investment strategies are more complex than this, involving risk management of various sorts. You've no doubt heard the phrase "don't put all your eggs in one basket"; or, as the Bible says, "Divide your merchandise among seven or even eight investments, for you do not know what calamity may happen on earth" (Ecc 11:2, NET). The naive investment strategy of simply buying whatever you think is the "best deal" or "most valuable" carries with it considerable risk -- if your whole net worth is in widgets and the market shifts to sprockets, all of a sudden you're stuck with a bunch of widgets nobody wants. Or if your whole net worth is in crops and then there's a storm that wipes them out, now all you've got is dirt. The naive investor thinks that because they work for a profitable company, they should invest everything in their company -- but if their company suffers (whether due to fraud like Enron or a simple market shift like many real estate companies in 2008) they lose their job and their investments all at the same time. The idea behind diversification is to target things that are valuable and which are not strongly correlated to each other, such that even if you're wrong or conditions change in some areas, your losses can be offset by gains elsewhere. Diversification is not a "weasel word" (though some may occasionally misuse it); it's a widely understood concept that's described by pretty much every personal finance writer out there. (Note that I'm not specifically saying Pincus is a good guy. Just that it makes a lot of sense for CEOs and others to swap some of their equity for equity in non-correlated assets.)
- MikeCapone 14y ago
  > You've no doubt heard the phrase "don't put all your eggs in one basket" Buffett and Munger's response to that is to "put all your eggs in the same basket, and watch that basket". At various times both men have been very heavily concentrated in their best ideas (Buffett was once about 75% into GEICO many decades ago -- admittedly that's extreme even for him, but many value investors aim for less than 10 investments). They say that diversification is often "diworsification" (I think that's a Peter Lynch phrase... or maybe Phil Fischer) because it's impossible to know that many companies well enough to have high confidence, and because your 20th best idea will never be nearly as good as your best and second best ideas, so it's often better to just add more to your best ideas. Of course, the caveat of this is that you must know what you are doing. Diversification is insurance against not knowing what you're doing, and index funds are probably the best strategy for someone not putting in the time (which is most people). But if you take investing seriously, high diversification is not always necessary or even desirable.

by anon808 14y ago

marvin 14y ago

It's about decreasing risk and volatility. If you're an insider in Zynga or Facebook, you might have slightly more information than the stock market...but probably not a lot. You can't expect to out-guess the market considerably. All else being equal (in other words, unless you have information that the rest of the market does not), your expected return will be the same if you own one stock in a certain industry as if you own a lot of different stocks in the same industry. If you roll one dice, the average number of eyes is the same as if you average over 100 dice rolls...but the probability of ending up at the extreme end of the scale is much higher. This is why investors want to diversify. What is best, in practical terms, for an average person: getting a guaranteed 2 million dollars or having a 1 percent chance of getting 200 million dollars?

anon808 14y ago
"If you're an insider in Zynga or Facebook, you might have slightly more information than the stock market" What if you're the guy running the entire company? Will this mythical 'market' you keep referring to run your company better than you can?
- marvin 14y ago
  That I have no idea about; you'd have to do a survey and get honest results from CEOs which have run companies that tanked. CEOs have much more insider information than "this mythical market", but I'm sure primary insiders have occasionally been blindsided by a crash in the stock value before it was obvious that anything was wrong with the company. Regardless, Pincus & co. will probably be investigated by the SEC after this. Illegal insider trading is punished very harshly.

stickfigure 14y ago

No matter how promising you think any particular stock or investment is, there's always a chance that you're wrong. Are you willing to play russian roulette with your entire net worth?

lotharbot 14y ago

> "usually people hold onto things they think are valuable and sell those they don't." Usually, investment strategies are more complex than this, involving risk management of various sorts. You've no doubt heard the phrase "don't put all your eggs in one basket"; or, as the Bible says, "Divide your merchandise among seven or even eight investments, for you do not know what calamity may happen on earth" (Ecc 11:2, NET). The naive investment strategy of simply buying whatever you think is the "best deal" or "most valuable" carries with it considerable risk -- if your whole net worth is in widgets and the market shifts to sprockets, all of a sudden you're stuck with a bunch of widgets nobody wants. Or if your whole net worth is in crops and then there's a storm that wipes them out, now all you've got is dirt. The naive investor thinks that because they work for a profitable company, they should invest everything in their company -- but if their company suffers (whether due to fraud like Enron or a simple market shift like many real estate companies in 2008) they lose their job and their investments all at the same time. The idea behind diversification is to target things that are valuable and which are not strongly correlated to each other, such that even if you're wrong or conditions change in some areas, your losses can be offset by gains elsewhere. Diversification is not a "weasel word" (though some may occasionally misuse it); it's a widely understood concept that's described by pretty much every personal finance writer out there. (Note that I'm not specifically saying Pincus is a good guy. Just that it makes a lot of sense for CEOs and others to swap some of their equity for equity in non-correlated assets.)

MikeCapone 14y ago
> You've no doubt heard the phrase "don't put all your eggs in one basket" Buffett and Munger's response to that is to "put all your eggs in the same basket, and watch that basket". At various times both men have been very heavily concentrated in their best ideas (Buffett was once about 75% into GEICO many decades ago -- admittedly that's extreme even for him, but many value investors aim for less than 10 investments). They say that diversification is often "diworsification" (I think that's a Peter Lynch phrase... or maybe Phil Fischer) because it's impossible to know that many companies well enough to have high confidence, and because your 20th best idea will never be nearly as good as your best and second best ideas, so it's often better to just add more to your best ideas. Of course, the caveat of this is that you must know what you are doing. Diversification is insurance against not knowing what you're doing, and index funds are probably the best strategy for someone not putting in the time (which is most people). But if you take investing seriously, high diversification is not always necessary or even desirable.