Andrew Carnegie was quoted once as saying, “Keep all your eggs in one basket, then take care of that basket.” This flies in the face of the holiest of the financial holy grails: diversification. Jim Cramer even has a segment on his show called, “Am I diversified?” where callers list 5 stocks in their portfolio and Cramer announces his verdict either yes or no.
So why would a man who was the richest the world had ever seen tout a philosophy contrary to general thinking? Why would Warren Buffet have the majority of his holdings in 30 to 35 stocks and not the “broad based index funds” everyone trumpets? He averages 28% return (not the 8% – 12% the S&P has historically returned).
Why? In a word: FOCUS
The business owner who puts all his eggs in one basket isn’t foolish, he’s committed. I’ve seen business owners cash in college savings accounts, cash in life insurance policies, sell almost everything they owned and mortgage their home to the max in order to fund their company. These guys were my partners in business. We made it because of commitment and focus. ALL our eggs were in one basket. I’ve watched others who hedged their bets and had back up plan after back up plan. They didn’t make it. Their plans weren’t what was wrong, it was their commitment.
Most people who sing the praises of “Don’t put your eggs in one basket” don’t have experience of starting a business with limited capital. They just keep saying what the gurus say. Most of those gurus never started a business from scratch.
Investors and new business owners today want to “set it and forget it.” No one wants to be bothered with focus or with educating themselves on business valuation. In my opinion, if you have this attitude and you experience a 40 year return on your broad based mutual fund of zero percent, don’t say you weren’t warned. The stock market has seen long extended runs of flat or even negative returns for the market as a whole, but for those who learned to focus, great wealth was to be had. Everyone wants to say that the “average” return on the S&P has been 12 percent. When was the last time the market returned the exact same amount as its average?
What happens when the Baby Boomers start taking their money out of the market? When they being selling their holdings to fund their lifestyle, I believe you will see a long term decline in the market. As sellers outnumber buyers, the market will tank. Add to this potential problem our current tightening of credit, the declining dollar, a housing market that is struggling to stay afloat, the rise of China and India to compete with the US on all economic fronts, and oil that is through the roof and you have the makings of a long stagnant market return.
Remember, you cannot manage ANYTHING based on averages. Managing by the averages is a recipe for disappointment and disaster. Everything in your life must be managed on the basis of the available knowledge you have at the time. If you say a mutual fund has averaged 11.4 percent over the last 5 years should you think that it will continue? No. Will it continue over the next 10 years? No. The next 20 or 30 years? No. Dollar cost average all you want. It won’t guarantee an average return over any investment horizon. Things change. If your mutual fund is heavily slanted toward the housing industry today, I’d suggest moving to another investment vehicle, perhaps something in the “green” category?
I am not saying to invest all your money in one “hot” stock, that would be stupid. “Taking care of that basket” is beyond your ability. But if you are able to care for your basket, in the form of investments in real estate or a business, there is absolutely nothing wrong with putting all your eggs there.
So, put all your eggs into the one basket you can take care of. You can control how it performs and how it succeeds. I’d much rather watch over my own eggs than have someone else doing it.
[tags]average, eggs, basket, fund, market[/tags]