“To make it, concentrate;
to keep it, diversify.”
– The Maxims of Wall Street, Page 158
Over many years, I’ve spoken at hundreds of conferences, including The Oxford Club’s Investment U Conference, the MoneyShow, the New Orleans Investment Conference, the Gold Show, and FreedomFest. I could hold the Guinness World Record in that category if such a category existed.
The majority of those attending are likely retirees or approaching retirement.
There is one incident from a conference that I will never forget, and you shouldn’t either.
In the mid-1980s, I was awakened at 7 in the morning in my hotel room in Los Angeles, where I was speaking at a Howard Ruff conference.
The man on the other line was upset. He said he had just started to subscribe to my newsletter and needed some advice.
He had recently sold his business for several million dollars and had invested in a foreign mutual fund that promised 20% annual returns with little risk. It was not one of my recommended funds.
Everything was fine, he said, until he contacted the fund to make a withdrawal. The foreign operator sent him a check, but the check bounced. When he contacted the company again, they made some excuse and sent another check. That one bounced too. He called the fund on the telephone, and there was no answer.
“What can I do to get my money back?” he begged.
“I’m afraid you have become a victim of a financial fraud,” I explained, “and because it’s outside the United States, there’s little you can do about it.”
There was silence on the telephone. I could hear the man sobbing. He said something I’ll never forget.
“I invested everything – all my money – in this fund!”
Then he added a bombshell with considerable emotion: “And I invested my wife’s money too.”
Talk about a double whammy.
It was difficult to offer any advice that would comfort this retiree. I had no choice but to tell him that he had to start over – and go back to work, perhaps – while relying on Social Security for living expenses.
He had a sizable home to sell and downsized into a rental property. It was a sad story I’ve never forgotten.
“Investing in One Lesson”
This man had been highly successful by concentrating on his business, which he’d sold for several millions. As Gerald Loeb states in his classic book The Battle for Investment Survival, “The really great fortunes were made by concentration, not diversification” (also quoted on Page 158 of The Maxims of Wall Street).
The man’s mistake was doing the same in investing – concentrating on one mutual fund that promised guaranteed double-digit profits year after year.
He should have diversified his nest egg. He did not realize that investing in a business is not the same as the business of investing!
When you sell your business (or acquire a large sum of money through some other means), you are most vulnerable to being taken advantage of by some salesman who promises high returns with little risk.
When you are young, you can afford to take risks in business – or in investing, such as penny stocks, pre-IPO private placements, or non-dividend-paying growth stocks.
But when you are older and near retirement, it pays to diversify rather than putting all your eggs in one basket.
Yes, you can invest in penny stocks or other risky stocks, but don’t make the mistake of investing all of your liquid assets in one company, one broker, or one mutual fund. You can invest 15% of your portfolio in high-risk ventures, but not 85%!
And don’t let greed overwhelm you. I’ve known too many attendees at conferences who see dollar signs in their eyes when they listen to a speaker or talk to an exhibitor.
Remember, every money manager and exhibitor tells a good story – but the stories may be exaggerated. Always investigate before you invest (Page 83, Maxims).
Remember the Investment Pyramid
Money managers and financial advisors often refer to the Investment Pyramid:
The wide-based investment pyramid doesn’t make a lot of sense when you are young and can afford to take high risks.
The young investor’s pyramid should look more like an obelisk.
But once you have made it financially, make sure your nest egg is secure.
Few retirees are comfortable investing in volatile assets like non-dividend-paying Nasdaq stocks that can rise or fall 10% or 15% in a day. They prefer bank savings accounts and blue chip stocks that pay dividends.
When you achieve financial independence, diversification is the key, and a broad, conservative base is wise.
I’ll end with a saying on Wall Street and a Kurdish proverb:
- “If you have a little, use a rifle. If you have a lot, use a shotgun” (Page 159, Maxims).
- “Stretch your feet according to the blanket.”
Good investing, AEIOU,
Dr. Mark Skousen
P.S. I’ve quoted several times from my book The Maxims of Wall Street, which contains a great deal of sound advice for investors of all ages. It is not just a quote book, but offers short stories, pearls of wisdom, and counsel from Warren Buffett, Peter Lynch, J. Paul Getty, Benjamin Franklin, and even Rick Rule and Oxford Club Chief Investment Strategist Alexander Green – all highly successful investors.
At last year’s Las Vegas MoneyShow, an attendee named Lye Mader from Lewiston, Idaho, proclaimed, “The Maxims of Wall Street is the best book I’ve ever read!”
I responded, “Don’t you mean the best financial book you’ve ever read?”
“No,” he said emphatically. “The best book I’ve ever read, period. And I’ve read a lot!”
High praise indeed!
Each section is divided into categories, such as “contrary investing,” “penny stocks and gold bugs,” “fundamental versus technical analysis,” “growth versus income,” and “diversification versus concentration.” There are over 100 categories.
Maxims is now in its 12th edition and has sold over 50,000 copies. It’s available for only $22 per copy ($12 for additional copies – they make great gifts) at www.skousenbooks.com. I autograph and number each copy and mail it at no extra charge inside the U.S. Go here for more information.