Investing Rules from an Old Guy

Rule #12

Investing is about managing risk.

On average, more risk leads to more returns but the key word here is “average”. The way to manage risk is to build a diversified portfolio of investments. Hitting a home run is hard. Getting a few hits is entirely doable. Getting more hits than 50% of all investors including the professionals is exhilarating but to be honest, is harder than it sounds.

When my father was playing the stock market, he bought AT&T and GE. When I started my career, everyone bought IBM, DEC, and HP. Then the hot companies became Apple and Microsoft. And now it is Facebook, Amazon, Netflix, and Google. In hindsight, had I bought these stocks earlier, I would now be a wealthy old guy. My point being that it is damn hard to know which small stocks today will become tomorrow’s dominant players.

With a diversified portfolio one can buy and hold 10-20 stocks and hope that a few turn out to be big winners. And the math is in your favor. The worst a stock can do is a total loss of 100%. However, the best a stock can do is infinite! It can gain 200%, 500% or even 1000% over the long-run. You must be patient to get a few big winners which will more than offset your losers.