In Paris, on the charming Viaduc des Arts, there are many “one-thing shops”. There’s a perfumery, a framer, and an umbrella shop. Parasolerie Heurtault sells one thing only: umbrellas. Mind you, they are verra, verra nice umbrellas. The proprietor, one Monsieur Michel Heurtault, makes hand-stitched brollies in waterproof silk taffeta with handles made of ebony, Bakelite lacquered wood, and, gasp, antique ivory.
It’s a risk to commit to just one thing. A prolonged drought, a public distain for theatrical presentations of My Fair Lady or Mary Poppins, or some other cause of falling umbrella demand, and, poof! the business collapses.
When it comes to investing, the mantra is diversify, diversify, diversify. To risk-proof a portfolio, pundits recommend owning 4-6 asset classes and over 30 different equities. Today that’s easy enough to achieve with mutual funds and ETFs that mirror the markets.
But sometimes in the rush to diversify, something gets lost: Outsize profits.
While no rational person would ever suggest putting all your money in a fledging graphite stock trading for pennies over-the-counter, making big bets is one way top investors make big paydays.
Whales like Warren Buffett buy entire companies. Not exactly a committment-phobe, he. Further down the food chain, other investors find success by selecting asset classes they believe will do well and tilting their portfolios toward them. Again, this take a certain amount of chutzpah.
Spreading the love around, as an S&P 500 mutual fund does, divvies up the risk but it will never beat the market. And, factoring in management fees, it will always underperform the market.
Size does matter. Sizing investments is probably one of the hardest parts of being an investor. And nowhere is this more nerve-wracking than buying highly speculative stocks. Because most of these are fledging companies with no profits, they’re brittle little birds that could vanish in a blink under a strong breeze.
On the other hand, if they hit, they hit big. The rule-of-thumb is, assuming you have the appetite for them at all, to put no more than 5% of your total portfolio into high-risk stocks. Depending on the dollars this represents, you may be able to buy several of them. Ten-thousand shares might sound like a lot but if the stock is selling for 17 cents, you’re gonna want to back up the truck to get a meaningful position and the potential for a healthy return.
Once that stock starts to move, consider paring back your investment. Double-baggers do happen. (Your graphite darling might go from 17-cents to 34-cents.) But how likely is it to go from 34-cents to $3.40? Not very. If you’re still in love, keep some but play with the market’s money. Take out your original investment and find another undiscovered gem to buy, or send a kid to camp.
Sometimes betting on one-thing is a not-stupid investment. And, if you’re lucky, it can provide you with a nice, big umbrella for that rainy day.