Playing off of my last post on mutual funds, I wanted to say something about diversification. Wall Street, FA’s, and basically anyone involved with finance has increasingly banged into us the idea of diversification. It’s the old theory of “don’t put all your eggs in one basket”. While this is a great way to reduce risk, it’s also a great way to put a ceiling on returns. Take a minute to think about some of the richest people in the world, many of which happen to be in finance. Bill Gates–Microsoft. Carlos Slim–Mexican Telecoms. Warren Buffett–Berkshire Hathaway. The list is long as fuck, but you get the idea. All these guys were/are FAR from diversified. They focused on one area, and crushed it. While diversification is good for someone who can’t afford to lose, it’s not very useful for those looking to really make some money.
Why do you invest your savings? Not to have the smallest losses, but to have the biggest returns. If you hand your money off to a broker who is WILD good at trading options, why would you want him to invest some of your money in commodities? This isn’t to say you shouldn’t keep some money invested in safe assets, such as Treasuries/gold/low-volatility currencies, but if you think the tech industry is going to skyrocket, what’s the point of having 50% exposure to tech stocks and 50% exposure to say, utility stocks? Like life in general, you should stick to what you’re good at with investing. You can’t allow emotions to dictate your trades, and you can’t be good at every strategy. Speaking of which, just handed in some homework for an econ class, part of which was a problem about diversification. If I split my exposure to half China and half US, my expected utility is greater than just investing in the US! Dope! I think Jing Zhang woulda been pissed if I wrote “fuck that” as my answer.
Dow is down 172 11,951 and S&P is down 18 to 1,270 on the day. I’m beginning to get the feeling that the markets are playing off the news too much. Not only that, but expectations for the year were just incredibly too high. Now, Obama’s analogy of “if you get hit by a truck… it’s gonna take a while to mend ya know?” may be extremely retared, but he’s not wrong on the original point. You don’t have the Dow literally lose like 50% over a year and a half and just expect 3% yearly growth right off the bat. To reiterate what many have pointed out, this was the worst recession we’ve had since the Great Depression. These high expectations are only hindering growth. Record corporate profits obviously imply they’re hoarding a lot of cash, but it’s not like they’re gonna keep it forever. That money will be reinvested. Unemployment will eventually decrease. Have some faith in the market.
Larry Fink was on CNBC today giving his insights. Dudes a baller, I usually believe almost everything he says. Plus he just doesn’t look like a scumbag. He’s bullish on equities. One of his main reasons is the fact that the bond market is extremely overstuffed. I just posted a day or two ago about how some people are hoppin’ on bonds because they’re just looking for any safe rate of return. Well, there’s almost no profit opportunity now. The private sector benefitting a lot with the weak dollar and are in a great position to grow. Honestly, there’s not much room for this economy to go south unless you consider a depression a possibility. Which it’s not, and a “double dip” won’t happen either. There’s far too much liquidity for another recession. The worst possibility I see is just very slow growth for another year or two from uneasy investment. But the markets, and the economy as well, will pick up.
As for my thoughts on the speculation of QE3, I’ve found myself getting consistently annoyed of those who say it has failed. Investment has increased over the past year. The unemployment rate has dropped over 1% since it started, and I’d venture to say that without QE it wouldn’t have dropped nearly that much (as in it would probably be the same). People are so quick to say QE has failed because the growth is so slow, but where’s the evidence that the economy would be in a better position without it? I don’t see it and I haven’t heard it. All these fuckin’ bears are just scaring everybody, that’s what I think. A little more optimism would help ease consumer confidence.