Risk and volatility seem to be always thrown around and used by financial planners or investment advisors, until almost everyone thinks risk is volatility, volatility is risk.
Volatility in my interpretation are temporary deviation from the desired destination. In your wealth building terms it would look something like this:
Life is not always a bed of roses, but you will eventually get there.
Risk is the probability of a different outcome from the desired outcome. That sounds complex. it means that you are suppose to go to the library to study but somehow ends up being knock down by a bicycle by accident. You didn’t get to the library but somewhere else.
In wealth building it looks like this:
That does not look good. This is why planners and advisors preach adequate diversification, so that if you have 5000 stocks and 20 of them becomes like this, you will do ok.
You will see the difference here if you are wealth building through unit trusts, exchange traded funds versus individual stocks, whether trading or value investing (that doesn’t mean a basket of stock wont become like ^ , it just mean chances are much smaller, think if you buy into a Russia ETF and real turmoil ensues. All corporations nationalize)
When you invest with little diversification
Some of my friends hate diversification. They felt that you don’t feel the gain if one stock shoots up 100% in a year. They failed to see the opposite is true. I know of investors that have great results over 10 years in excess of 10% 10 year compounded returns advocating only 5-7 stocks. Very concentrated.
But you have to understand the context. They put in a hell of a work prospecting these 5-7 business and watching them like a hawk. The benefits is that you get rewarded for the effort you put in. However, it doesn’t mean that things doesn’t blow up. They watch it like a hawk, and because there is only a manageable size, they can spend 1 day for each stock per week out of their full time work to scoop up news relating to the industry, think about what the hell could cause the permanent capital loss.
When you sharpen your craft to an adequate level, you weed out on a lot of the risk. But there are unknown unknowns, and you won’t be able to eliminate them. Your craft brings you to get a stake in a business with a high degree of confidence that it doesn’t come with permanent loss.
If that sounds like a lot of work, diversify. Live with the possibility of lesser returns ( its not high risk high returns, its you think there is a possibility of higher returns due to the high risk)
If you view my portfolio you would realize there are some higher concentration. I shift to the view that the higher the holdings, its either that i have gain a lot, or that its those that I have done more homework.
But it still doesn’t mean they won’t blow up. There is a limit to a person’s competence up to his experience at that stage and for me this is no exception as well.
Someone tell me that, no matter how much you do, always think, whether if you lose that % of capital, you can live with it. Think in terms of % but also in $ terms. There is no free lunch. If not be conservative.
The story of GTAT
The least amount of diversification is when you put your entire portfolio in 1 thing. Why would someone do that. They may not have learn position sizing or viewing things from a portfolio perspective, or that their investment advisor is not doing a good job, or they don’t have one and have not build up adequate competency.
If your stock ends up like Apple. Hurray. Then again your stock could be GTAT.
GTAT stands for GT Advanced. The company apparently became the exclusive supplier of sapphire material to Apple to be incorporated into iPhone 6 and iPhone 6 plus. Then, Apple announced they are not going to use sapphire material. This is what happen to the stock.
The White Coat Investor talks about how he got to know about this stock from the Bogleheads forum, a forum on index investing. In it they provided a link where investors of GTAT discuss about it.
It’s a good sobering lesson for myself what I need to look forward to. Read Putting All your Eggs in 1 Basket.
It makes me realize that not letting people use 100% of their CPF to purchase individual stocks in Singapore may not be such a bad plan.
Here are some of the experience, I won’t paste all.
One forum administrator:
I am sorry for your loss. I am in a similar situation that you are right now; lost all of my savings, have a mountain of debt and have two little kids to take care of. But I will survive and grow stronger from this. I am going to work twice as hard to make a better future for my family, and will make sure that my kids get everything they need, deserve, want, and even stuff they didn’t know they wanted. I got greedy and wanted to make a quick buck to give them that better future today, so that will be a great lesson learned.
From a mother with a special needs child:
I am totally numb. Just got home after working. I saved this money for over 25 years and it is gone in a day. I haven’t sold my shares because I just don’t know if the shares will be worthless soon or any chance that they may come back. I bought at $18 and 18.25 and have about 4700 shares. This is everything. My retirement and my savings for my son and me. This is so hard for me to take in because my son has special needs and this was for him and his future, especially when I’m not here any longer. He is getting of the bus soon so I need to dry my tears and put on a smile. He is the best son a mother could ever wish for. I just feel and know that I have failed him and trying to figure out what to do. Should I sell now and at least have a couple thousand for us to at least have a few weeks to figure out what to do. I feel for everyone on here who lost. I was advised by someone who I trusted dearly not to sell. My instincts told me otherwise but I put my trust in this individual because I just felt so inept at trading and believed he knew much more than me. I will more than likely have to sell our home and struggle with this only because change is so difficult for my son. I apologize for venting but I am too ashamed to share this with my family or friends. I shared this with the person who advised me to hold and my messages go unanswered.
Some crazy numbers here:
I am dead meat. All my money is in GTAT and on my stocks I was doing margin. Since I owe way more than what’s in there, I don’t know what will happen to margin. Some people were smart, I believed so much in GTAT potential and lost all my savings including my 401K, IRA. At this point, I don’t know what to do. I told my wife about this and she was upset and angry at my stupid move. But she still loves me.
The next day……
This would be my last post on this forum. I am officially signing off. Thanks for all the contributions. I am still in shock and all the money is gone and I owe $107K in margin accounts. I have prepared my profit and loss for filing a case and here the final numbers…Basically my net loss is around $750K in stocks and $140K in options. All my earnings for the past 15 years are gone in one night.
All I can wish is, all of family members of TG and the crooked directors face some grueling death. Yesterday I was in the verge of committing suicide myself and with a loving family, I didn’t have the courage. Good bye to all. Time to start Life 2.0
There are days when i think whether I was overconfident in my picks to put such a % of my net worth in it. There are also days when I did so much work but didn’t put in enough. We can only learn more to build up competence but also from experience. There is always a balance to everything. If I have done all I can to evaluate risks, keep watch for risk triggers. Always stare hard at that figure you put in that, if you lose it permanently, would life still go on, can you life with yourself, whether there is anything more you could do in such a situation.