Bulls Make Money, Bears Make Money, Pigs get Slaughtered


The title of today’s post is an old Wall Street axiom related to asset allocation and greed.  It means that people who buy stocks (bulls) and those who sell stocks short (bears) can both make money.  There are times when each of these strategies are effective.  Those who hold for too long, or put too much in any one stocks, however, eventually get slaughtered.  It is important to remember that no stock will go up, or down, forever and one must always be wary of the possibility of sudden movements the other way.

As long-time readers of this blog will note, I tend to favor less diversification than is the standard.  Many money managers will advocate investing in hundreds of stocks, saying most investors should not even buy single stocks because they can’t get enough diversification unless they have millions of dollars.  The trouble with that philosophy is that 1)while it is true this provides downside risk, it also limits one to just making the market averages or less after fees, 2)one has little control over taxes because the taking of capital gains is up to the whims of the mutual fund managers, and 3)it leaves one subject to the little games that the mutual fund managers play, like buying the hot stocks just before reporting holdings to look like they were in the best companies all along.

There is nothing wrong with holding some mutual funds.  If one has quite a bit of money mutual funds provide good insurance against sharp declines that single stocks endure.  If one only has a few thousand dollars to invest, however, it makes little sense to spread that money out over 100 or 1000 stocks.  The advantage of being able to double or triple that $3000 in a year or two outweighs the risk of losing $1500 or $2000, or even the whole amount due to a missed earnings report or a scandal at the company.  Note also that investing over the long-horizon of years also reduces risk because over time most good companies will grow in price even though they may decline in any period of weeks or months.

Here again, though, one does not want to be piggish and face the slaughter.  For this reason my strategy is to concentrate in a few, great stocks, adding money all of the time to my investments, but when a position gets to be so large that I would not want to risk that amount, I pare it down and invest some of the funds in another stock.  This is true even if I think that the company has great prospects and will continue growing indefinitely.  I could be wrong and I don’t want to give back all of the gains I have made should the stock turn against me.  One strategy is even to sell enough to recover all of the money that had been invested.  Additional shares can then continue to be sold as the stock makes new highs.  In that way most of the profits made are secured as the stock rises should the stock turn around and fall.  It also gives a psychological boost to know you will make a profit no matter what, allowing one to “let the rest ride” with confidence.

As a portfolio grows from a few thousand dollars into hundreds of thousands, mutual funds should be purchased to lock in gains and provide security through diversification.  A portion of the portfolio remains concentrated in individual stocks with good prospects, however, but not so much so as to risk a loss that one cannot sustain.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.