Friday, April 17, 2009

To Invest Big Or Not At All

When you invest in a particular stock, how much money do you put into it? Is it 10% or 20% of your net worth (money available for investment) or more? Or just 2%? Most, not all (exceptions like Public Mutual and HLG Unit Trust), mutual fund investors invest an average of 2% in one stock. This is due to the fact that most mutual funds are well diversified - more than 50 stocks in each portfolio.

"Personally, Im amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? Its insane." - Mark Seller in his article "So You Want To Be The Next Warren Buffett? How's Your Writing?"

How about that? If something is not worth doing at all, its not worth doing well. Familiar? The next time you invest in a stock, think about it. Is it worth investing 2% in this stock? Or not at all? Or is this one of the few good opportunities to put in 20%? If you cant do it now, when do you expect to do it? Think about it.

Time to ponder:
We continually look for ways to employ large sums in each area - ownership of business and marketable securities. But we try to avoid SMALL commitments - "If something is not worth doing at all, its not worth doing well". -Warren Buffett, 1981

1 comment:

Michael Tsen said...

now may be the safe time to say this but overall, deciding how much to put in one vehicle is totally a personal choice, and that has got to do with how much you know about that vehicle

"There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play." - Jesse Livermore