SmartStops comments: If you study successful investors, you will find that they don’t necessarily follow a diversification rule. That was created many many years ago with the advent of Modern Portfolio Theory however even MPT has morphed now.
If you use tools like SmartStops Jow Much to Buy Calculator for proper position sizing and SmartStops Risk Alerts, you can actually stay better protected even while investing in “riskier” equities that can generate higher returns for you.
Important points highlighted below from a worthwhile article to read:
” The “greatest money making machine in history”, a man with “Jim Roger’s analytical ability, George Soros’ trading ability, and the stomach of a riverboat gambler” is how fund manager Scott Bessent describes Stanley Druckenmiller. That’s high praise, but if you look at Druckenmiller’s track record, you’ll find it’s well deserved.
Druck averaged over 30% returns the last three decades — impressive.
Here’s Druckenmiller on using the big bet philosophy :
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.2
A lot of wisdom in that paragraph. To earn superior long-term returns you have to be willing to bet big when your conviction is high. And the corollary is that you need to protect your capital by not wasting it on a “bunch of stuff” you don’t have much conviction on. ”