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Diversify, Especially If You Don't Know What You Are Doing!
In the words of famed e conomist John Maynard Keynes, diversification is insurance against ignorance.
著名经济学家John Maynard Keynes说过多样化是战胜无知的保证。
He believed that risk could actually be reduced by holding fewer investments and getting to know them extraordinarily well.
Of course, the man was one of the most brilliant financial minds of the past century so this philosophy isn’t sound policy for most investors, especially if they can’t analyze financial statements or don’t know the difference between the Dow Jones Industrial Average and a Dodo.
These days, widespread diversification can be had at a fraction of the cost of what was possible even a few decades ago. With index funds, mutual funds, and dividend reinvestment programs, the frictional expenses of owning shares in hundreds of different companies have largely been eliminated or, at the very least, substantially reduced.
This can help protect you against permanent loss by spreading your assets out over enough companies that if one or even a few of them go belly-up, you won’t be harmed.
In fact, due to a phenomenon is known as the mathematics of diversification, it will probably result in higher overall compounding returns on a risk-adjusted basis.
One thing you want to watch for is correlation. Specifically, you want to look for uncorrelated risks so that your holdings are constantly offsetting each other to even out economic and business cycles.
When I first wrote the predecessor to this piece almost fifteen years ago, I warned that it wasn't enough to own thirty different stocks if half of them consisted of Bank of America, JP Morgan Chase, Wells Fargo, U.S. Bank, Fifth Third Bancorp, et cetera, because you may have owned a lot of shares in several different companies but you were not diversified; that a "systematic shock such as massive real estate loan failure could send shockwaves through the banking system, effectively hurting all of your positions", which is precisely what happened during the 2007-2009 collapse.
Of course, the stronger firms such as U.S. Bancorp and Wells Fargo & Company did just fine despite a period when they had declined 80% on paper peak-to-trough, especially if you reinvested your dividends and were dollar cost averaging into them; a reminder that it's often better to focus on strength first and foremost.
Behavioral economics, on the other hand, has proven most people are emotionally incapable of focusing on the underlying business, instead of panicking and liquidating at the least opportune moment.
But beside all these, just remember: Stick to Stocks Within Your "Circle of Competence"
In investing, as in life, success is just as much about avoiding mistakes as it is about making intelligent decisions.
If you are a scientist who works at Pfizer, you are going to have a very strong competitive advantage in determining the relative attractiveness of pharmaceutical stocks compared to someone who works in the oil sector.
Likewise, a person in the oil sector is going to probably have a much bigger advantage over you in understanding the oil majors than you are.
Peter Lynch was a big proponent of the “invest in what you know” philosophy.
In fact, many of his most successful investments were a result of following his wife and teenage kids around the shopping mall or driving through town eating Dunkin’ Doughnuts.
There is a legendary story in old-school value investing circles about a man who became such an expert in American water companies that he literally knew the profit in a tub full of bathwater or the average toilet flush, building a fortune by trading a specific stock.
One caveat: You must be honest with yourself. Just because you worked the counter at Chicken Mary's as a teenager doesn't mean you are automatically going to have an advantage when analyzing a poultry company like Tyson Chicken.
警告：你必须要对自己诚实。仅仅是十多岁时在Chicken Mary's站过柜台并不意味着在分析Tyson Chicken这样的家禽公司时你就有优势了。
A good test is to ask yourself if you know enough about a given industry to take over a business in that field and be successful. If the answer is "yes", you may have found your niche. If not, keep studying.
In general, people seem to know that inflation is often not a good thing in an economy. This makes sense, to some degree- inflation refers to rising prices, and rising prices are typically viewed as a bad thing.
Technically speaking, however, increases in the aggregate price level need not be particularly problematic if prices of different goods and services rise uniformly, if wages rise in tandem with the price increases, and if nominal interest rates adjust in response to changes in inflation. (In other words, inflation need not reduce the real purchasing power of consumers.)
There are, however, costs of inflation that are relevant from an economic perspective and cannot be easily avoided.
When prices are constant over long periods of time, firms benefit in that they don't need to worry about changing the prices for their output.
When prices change over time, on the other hand, firms would ideally like to change their prices in order to keep pace with the general trends in prices, since this would be the profit-maximizing strategy.
Unfortunately, changing prices is generally not costless, since changing prices requires printing new menus, relabeling items, and so on.
Firms have to decide whether to operate at a price that is not profit-maximizing or incur the menu costs involved in changing prices.
Either way, firms bear a very real cost of inflation.
The term shoe leather costs refer to the figurative cost of replacing shoes more often due to the increase in the number of trips to the bank, but shoe leather costs are a very real phenomenon.
Shoeleather costs are not a serious issue in economies with relatively low inflation, but they become very relevant in economies that experience hyperinflation. In these situations, citizens generally prefer to keep their assets as foreign rather than local currency, which also consumes unnecessary time and effort.
Whereas firms are the ones who directly incur menu costs, shoe leather costs directly impact all holders of currency.
When inflation is present, there is a real cost to holding cash (or holding assets in non-interest bearing deposit accounts), since the cash won't buy as much tomorrow as it could today.
Therefore, citizens have an incentive to keep as little cash on hand as possible, which means that they have to go to the ATM or otherwise transfer money on a very frequent basis.
Misallocation of Resources
When inflation occurs and prices of different goods and services rise at different rates, some goods and services become cheaper or more expensive in a relative sense.
These relative price distortions, in turn, affect the allocation of resources toward different goods and services in a way that would not happen if relative prices remained stable.
Unexpected inflation can serve to redistribute wealth in an economy because not all investments and debt are indexed to inflation.
Higher than expected inflation makes the value of debt lower in real terms, but it also makes the real returns on assets lower.
Therefore, unexpected inflation serves to hurt investors and benefit those who have a lot of debt.
This is likely not an incentive that policymakers want to create in an economy, so it can be viewed as another cost of inflation.
In the United States, there are many taxes that do not automatically adjust for inflation.
For example, capital gains taxes are calculated based on the absolute increase in the value of an asset, not on the inflation-adjusted value increase.
Therefore, the effective tax rate on capital gains when inflation is present may be much higher than the stated nominal rate.
Similarly, inflation increases the effective tax rate paid on interest income.
Even if prices and wages are flexible enough to adjust well for inflation, inflation still makes comparisons of monetary quantities across years more difficult than they could be.
Given that people and companies would like to fully understand how their wages, assets, and debt evolve over time, the fact that inflation makes it more difficult to do so can be viewed as yet another cost of inflation.