4 ms·

Isn't it stupid to just to have one job, one car, be a citizen of one country, have one house and one family. I mean really - one must diversify. What would you

Isn't it stupid to just to have one job, one car, be a citizen of one country, have one house and one family. I mean really - one must diversify. What would you do if you lost any one of those? No, it's not stupid to concentrate wealth. Problems only arise when you do it stupidly, like buying too big a house, being part of the wrong family, living in the wrong country or buying an unsafe car. Diversification does not reduce risk but it cuts your returns in half. All correlations go to one in a crisis and you can't hedge the end of the world. Note: To all downvoters - putting all your eggs in multiple baskets does not protect you from an asteroid impact any more than a person with all eggs in one basket. People who think diversification makes them safe are frankly wrong.

mylittlepony 14y ago
Diversification does reduce the risk of losing it all, as it changes the probability distribution (https://en.wikipedia.org/wiki/Probability_distribution https://en.wikipedia.org/wiki/Probability_distribution). It also reduces the probability of winning a lot, but people like stability.
- confluence 14y ago
  Only if the assets are uncorrelated and independent. Otherwise diversification often gives a false sense of security with higher systemic risk (see GFC).
  - Someone 14y ago
    Not "Only if the assets are uncorrelated and independent", but "As soon as the assets are not 100% correlated". That is a huge difference. The dot com bust affected (almost) all tech stocks, but they didn't all go bankrupt.
mikeash 14y ago
I assume you don't bother to back up your data either.
- confluence 14y ago
  Diversification only works if your assets are independent. Buying multiple stocks is the same as buying a call on the world - it only reduces localised risk. But then again - why are you investing in companies that you believe have localised risk of bankruptcy and a low chance of attaining future profits.
polyfractal 14y ago
Diversification reduces risk, it does not eliminate it. Concentrating wealth in stock is a particularly dumb idea, because even public companies are relatively opaque. Enron looked like a pretty good deal to an outsider, right? Using things like citizenship, cars, households and families is a straw man and not related to financial investment at all.
- confluence 14y ago
  Enron didn't look like a good idea. They ran a commodity business at insane valuations with huge revenue run up during a bubble. Stating that Enron was a good idea was like stating Groupon was a good idea. Commodity companies that buy revenue (includes WorldCom and MCI) are always bad investments. Once again - had you invested in them you would be a moron. It'd be fair to state that diversification protects against stupidity. However, it does not reduce risk in the way people assume.
  - jlgreco 14y ago
    Put it this way, from the outside they looked a lot better than they really were. Looking as bad as Groupon and actually going as sour as Enron did are two wildly different things.
    - confluence 14y ago
      I fully expect Groupon to go bankrupt.
      - jlgreco 14y ago
        I wouldn't say Enron merely went bankrupt...
  - jamesaguilar 14y ago
    Man with that 20/20 hindsight you'd be a perfect historian. Can't say it does you much credit as a stock analyst though.
nandemo 14y ago
> Isn't it stupid to just to have one job, one car, Indeed people who own a job, a car or a house are well advised to have insurance. And insurance is a form of diversification. For countries the analogy is flimsy, but if you live in a country that has had any of: wars, dictators, property confiscation or high rate of violent crime in the recent past (which describes most of the non-developed world, including emerging countries), it's a good idea to have a passport and a way to move elsewhere.
- confluence 14y ago
  Then buy insurance - put out a costless collar if you are that worried. If you want to diversify you need to actually buy reverse correlated assets. So go ahead - hedge with options, hedge with futures, hedge with shorting the indices. But don't think buying disparate companies protects you - it doesn't.
  - jamesaguilar 14y ago
    There are degrees of protection. No protection is perfect, but you're a lot less likely to be totally wiped out with a diversified portfolio. 100% of my wealth is in company A, and it goes bankrupt, I have nothing. If I have it in two companies, unless they are perfectly interdependent, I lower my likelihood of being completely wiped out from 100% to <100%. Concentrating wealth in a single company increases the variance in your outcome, which is something most people consider bad in financial planning. It also requires active management, because even most temporarily successful companies do eventually go bankrupt. This is basic personal finance. TBH, I'm really surprised your comments aren't all at the lightest shade of gray already.
    - confluence 14y ago
      > basic personal finance I fully understand the arguments for diversification. Just like I fully understand CAPM, modern portfolio theory and the assumption that var=risk. But it's all bullshit. Why are you investing in companies that have that risk? If you understand which companies return higher returns - why aren't you all in on them? It's bloody hard to find good companies and when you do - why on earth would you diversify into their worse off counterparts? You need to have heavy concentration in great companies where you are perfectly fine having a 10 year hold on at the right price.

mylittlepony 14y ago

Diversification does reduce the risk of losing it all, as it changes the probability distribution (https://en.wikipedia.org/wiki/Probability_distribution https://en.wikipedia.org/wiki/Probability_distribution). It also reduces the probability of winning a lot, but people like stability.

confluence 14y ago
Only if the assets are uncorrelated and independent. Otherwise diversification often gives a false sense of security with higher systemic risk (see GFC).
- Someone 14y ago
  Not "Only if the assets are uncorrelated and independent", but "As soon as the assets are not 100% correlated". That is a huge difference. The dot com bust affected (almost) all tech stocks, but they didn't all go bankrupt.

mikeash 14y ago

I assume you don't bother to back up your data either.

confluence 14y ago
Diversification only works if your assets are independent. Buying multiple stocks is the same as buying a call on the world - it only reduces localised risk. But then again - why are you investing in companies that you believe have localised risk of bankruptcy and a low chance of attaining future profits.

polyfractal 14y ago

Diversification reduces risk, it does not eliminate it. Concentrating wealth in stock is a particularly dumb idea, because even public companies are relatively opaque. Enron looked like a pretty good deal to an outsider, right? Using things like citizenship, cars, households and families is a straw man and not related to financial investment at all.

confluence 14y ago
Enron didn't look like a good idea. They ran a commodity business at insane valuations with huge revenue run up during a bubble. Stating that Enron was a good idea was like stating Groupon was a good idea. Commodity companies that buy revenue (includes WorldCom and MCI) are always bad investments. Once again - had you invested in them you would be a moron. It'd be fair to state that diversification protects against stupidity. However, it does not reduce risk in the way people assume.
- jlgreco 14y ago
  Put it this way, from the outside they looked a lot better than they really were. Looking as bad as Groupon and actually going as sour as Enron did are two wildly different things.
  - confluence 14y ago
    I fully expect Groupon to go bankrupt.
    - jlgreco 14y ago
      I wouldn't say Enron merely went bankrupt...
- jamesaguilar 14y ago
  Man with that 20/20 hindsight you'd be a perfect historian. Can't say it does you much credit as a stock analyst though.

nandemo 14y ago

> Isn't it stupid to just to have one job, one car, Indeed people who own a job, a car or a house are well advised to have insurance. And insurance is a form of diversification. For countries the analogy is flimsy, but if you live in a country that has had any of: wars, dictators, property confiscation or high rate of violent crime in the recent past (which describes most of the non-developed world, including emerging countries), it's a good idea to have a passport and a way to move elsewhere.

confluence 14y ago
Then buy insurance - put out a costless collar if you are that worried. If you want to diversify you need to actually buy reverse correlated assets. So go ahead - hedge with options, hedge with futures, hedge with shorting the indices. But don't think buying disparate companies protects you - it doesn't.
- jamesaguilar 14y ago
  There are degrees of protection. No protection is perfect, but you're a lot less likely to be totally wiped out with a diversified portfolio. 100% of my wealth is in company A, and it goes bankrupt, I have nothing. If I have it in two companies, unless they are perfectly interdependent, I lower my likelihood of being completely wiped out from 100% to <100%. Concentrating wealth in a single company increases the variance in your outcome, which is something most people consider bad in financial planning. It also requires active management, because even most temporarily successful companies do eventually go bankrupt. This is basic personal finance. TBH, I'm really surprised your comments aren't all at the lightest shade of gray already.
  - confluence 14y ago
    > basic personal finance I fully understand the arguments for diversification. Just like I fully understand CAPM, modern portfolio theory and the assumption that var=risk. But it's all bullshit. Why are you investing in companies that have that risk? If you understand which companies return higher returns - why aren't you all in on them? It's bloody hard to find good companies and when you do - why on earth would you diversify into their worse off counterparts? You need to have heavy concentration in great companies where you are perfectly fine having a 10 year hold on at the right price.