This Childhood Chore Taught Me That Some Classic Investment Advice Is Plain Wrong
I come from humble beginnings.
The village I grew up in had fewer than a hundred houses… most of them farms.
The nearest town was several miles away.
My family’s trips to the grocery store had to be well planned, and we always bought in bulk.
Even so, we would occasionally run out of supplies, especially fresh food. So we had to rely on our local farmers to supplement our shopping trips.
At first, this was my job.
I had to climb a small hill to get to a nearby farm… and then carry all the groceries back to my house.
A clumsy kid, I would often trip on my shoelaces, spill the milk, and break a few eggs.
Finally, my mother decided it was time for a change.
“From now on, your brother will accompany you on every trip. One of you is bound to manage to carry home a full carton of unbroken eggs,” she instructed angrily.
You can understand her logic. After all, “Don’t put all your eggs in one basket” is classic advice.
I see the wisdom in the thinking. However, in my experience, another approach can yield far better results…
Put All Your Eggs In One Basket And Then Watch That Basket Carefully
Eventually, I moved out of the small village.
First, to attend college… then, to an even bigger city, to get my MBA… and, finally, to Singapore, one of the largest cities in the world.
Each time, I had to put everything on the line… and invest all my money in a single venture.
The risk I was taking in each case was huge. However, I knew that, as long as I put in the effort, understood the possible outcomes, and prepared accordingly, I would succeed.
And the same can be said for investing.
Sure, diversification works well for passive investors and is an important asset protection tool. But how much money will it make you in the long run?
And what happens when you have a winning stock that grows and grows until it represents a large portion of your portfolio? Are you going to rebalance?
Imagine you’re an agent for outstanding college football players and get paid in royalties from their future contracts.
Only a few of your recruits likely end up achieving NFL stardom, but the royalties you earn from those few could exceed the royalties of all your other clients combined.
Would you sell your best player to another agent, just because he’s dominating your revenues?
No.
That would be like the New England Patriots selling Tom Brady because he’s critical for the team’s success.
If you want to achieve above-average returns, put all your eggs in one basket and then watch that basket carefully.
How To Prevent Your “Eggs” From Breaking
When making investment decisions, instead of asking myself how much I could gain… I consider how much I could lose.
Buying a small biotech firm researching new cancer treatments could give me stellar returns… but it could also turn into a painful loss.
To build a portfolio of mostly profitable investments, buy companies unlikely to experience significant change.
Not declining businesses but rather businesses that are almost certain to maintain their competitive strength over the next 5 to 10 years.
I believe it’s wiser and more profitable long-term to be confident of a double-digit return in five years… rather than to hope for a triple-digit return in 12 months.
Follow this approach, and soon you’ll be holding a handful of such stocks whose aggregate earnings will increase year-over-year, as will the value of your portfolio.
That’s the approach I employ when choosing stocks to recommend for my True Retirement Wealth subscribers… and it is serving me (and them) well.
Hope you and your family had a wonderful Christmas,
Leon Wilfan