OTW #059: Diversification is bad, Change your retirement strategy, Pelosi trades, and more.
Important financial stories to check out over the weekend
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1. Is diversification a bad thing?
In a thought-provoking article,
argues against the conventional financial wisdom of diversification.Here’s Harrison in his own words:
Rich people generally make their money by concentrating their wealth. Entrepreneurs often have all their wealth in a single company, their own which they have total control over. Diversification might be great for maintaining wealth but building wealth really requires concentration.
Diversification also easily becomes di-worsification: buying something just for the sake of buying it to be diversified. As opposed to investing in a few companies and really understanding them. If you have 30 good investment ideas, why not buy the best 5 or 10 rather than investing in ideas 20-30 just for the sake of being diversified…
In my opinion, diversification is largely a hedge against laziness. There’s no problem with diversification and it is an effective means of maintaining one’s wealth. But if you want to build wealth, investing in I’ve found to be investing in 5-15 well-managed businesses that you can understand is a far more effective way.
Source:
“Should You Diversify?”
Harrison cites Warren Buffett, Bill Ackman, and Peter Thiel as examples of world-class investors who also criticize diversification. In fact, one of Buffett’s more famous quotes is, “You know, we think diversification is—as practiced generally—makes very little sense for anyone that knows what they’re doing...it is a protection against ignorance.”
Antagonist’s take
Harrison’s article is well worth the read. I believe he’s correct too.
If you have expertise in stock research and investing, and you spot a high-conviction opportunity, you should overweight it. You don’t need to go “all-in,” but if you believe this investment will outperform most others, allocate your portfolio accordingly.
Of course, there are layers of assumptions built into this idea. First, very few people in the world have the investing chops of Buffett, Ackman, and Thiel. Moreover, even legends like them get it wrong form time to time. Everyone loses money on a trade at some point regardless of their experience and expertise.
Second, investing is just as much emotional (probably more) than logical. Most people don’t have the risk tolerance to stomach a large portion of their portfolio vaporizing because of one bad investment. This can cause them to sell even their high performers out of a sense of panic.
Lastly, diversification (and concentration) can take many forms. I also view diversification as a sliding scale as opposed to a binary diversified/not diversified choice.
For example, in the Antagonist Blend Portfolio, I use a combined “top-down” and “bottom-up” approach to select our positions. I first analyze sector, industry, and macro trends. Then, I look at individual companies or specialized ETFs that fit into those areas.
If you’re a premium member, you’ve seen me do with this with uranium. I’m more bullish on that industry than any other. Therefore, I’ve allocated a good portion of our portfolio toward positions that will benefit from rising uranium prices.
It’s true that choosing the best uranium position would yield higher gains than spreading my money across multiple holdings. The problem, however, is that I don’t know which single position will be the best. If I did, I’d go all-in!
Instead, I’ve selected a handful of uranium positions that I believe are well poised for massive gains over the short and long term. You can think of it like creating my own mini-ETF.
If I only chose one stock but was wrong, I would completely miss out on the “best” position. But by creating my own mini-ETF, I’ve increased my chances of gaining exposure to the top-performing stock. And, since I’ve concentrated on a specific industry, I won’t dilute my gains by being over-diversified.
While my strategy still has an element of diversification, it’s not the classic type that Buffett and others criticize.
If you’re interested in seeing more of how this strategy plays out in the real world, upgrade to a premium membership. You’ll get access to the Blend Portfolio, the Challenge Portfolio, and more. You can even try it for free for 7 days.
Concentration/diversification across asset classes
Lastly, asset classes are also extremely important when it comes to concentration and diversification. As market dynamics change, you can reduce your losses and increase your gains simply by allocating more toward certain asset versus others.
The simplest way to do this is through the Papa Bear portfolio, which I’ve written about many times. It’s completely free and takes just 10 minutes per month to implement. You can read the full details here.
2. Should you change your retirement strategy?
Last week, I summarized a report on the best countries for retirement. This week, let’s look at how to pay for that retirement.
A Morningstar article, “How Rising Interest Rates Affect Your Retirement Plan,” offers insights for those approaching and those who are already in retirement.
The authors, Christine Benz and Margaret Giles, discuss the impact of high interest rates on retirement portfolios. They emphasize that the higher yields now available on traditionally safer investments, such as cash and bonds, allow for more conservative asset allocations. They also explain the possibility of adopting higher starting safe withdrawal rates.
Specifically, Benz and Giles note that retirees with balanced portfolios can consider a starting withdrawal percentage of 4.0%, adjusted for inflation, to maintain a 90% probability of not depleting their funds over a 30-year period. That’s an improvement from previous years. When the authors conducted the same research in 2022, the safe starting withdrawal rate was 3.8%, and it was 3.3% in 2021.
Antagonist’s take
If you’re near or in retirement, this article is particularly relevant to you.
The ability to safely increase the starting withdrawal rate to 4.0% (with inflation adjustments) without jeopardizing the longevity of your retirement funds is a significant shift in strategy.
This adjustment is particularly notable when you consider the backdrop of the previous low-yield environment. Achieving such a balance between income generation and capital preservation was far more challenging when rates were near zero. Back then, you were almost forced to invest in risk assets to yield any kind of return.
Even if you’re not near retirement age, the article still offers important investing lessons. It stresses the necessity of adapting your financial planning in the face of changing market dynamics. Even slight recalibrations in your strategy and asset allocation can lead to significantly better outcomes than simply holding on.
3. Nancy Pelosi drives the market…again.
Palo Alto Networks (PANW) soared as much 10% last Monday alone after Congresswoman Nancy Pelosi disclosed that she took a huge position in the cybersecurity company.
Pelosi purchased between $500,000 and $1M worth of call options in the Nikesh Arora-led company, according to a congressional trading form filed by Pelosi. The purchase was made on Feb. 12.
The 83-year-old Pelosi also disclosed a call option purchase worth between $100,000 and $250,000. The purchase was made on Feb. 21, the same day shares plummeted after the company lowered its full-year revenue and billings guidance.
Source: Seeking Alpha, MSN
Antagonist’s take
Pelosi has long been at the center of controversy surrounding government officials and their investment performance. Her trades are legendary, but she also has a massive advantage: insider information.
It’s common for politicians to place huge trades—that result in huge profits—right before significant news is released to the public.
As committee chairs and members, politicians like Pelosi are privy to various and significant information that the public does not have access to. There is no shortage of examples of elected officials buying or selling stocks just before those positions make a big move in either direction.
If you’re interested in some examples, check out this post and this post from last year.
Last thing...
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Thank you for reading, and have a great weekend!
Jason Milton
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