Great Billionaires that have only one source of income
(AP Photo/Nati Harnik)
“Behold, the fool saith, “Put not all thine eggs in the one basket” – which is but a matter of saying, “Scatter your money and your attention”; but the wise man saith, “Put all your eggs in the one basket and – WATCH THAT BASKET .”
― Mark Twain, Pudd’nhead Wilson
Conventional wisdom dictates that diversification is essential to long-term investing success. You’re often told to spread your money across a variety of stocks or asset classes to protect yourself from risk.
However, some of the best investors, like Warren Buffett, George Soros, William J. O’Neil and Bernard Baruch spoke about the virtues of holding concentrated positions. “Diversification is a protection against ignorance,” according to Buffett. “[It] makes very little sense for those who know what they’re doing.”
Think about it – do you have the time to keep on top of dozens of companies in your portfolio? The average person simply cannot pay enough attention to a broad spectrum of stocks in a variety of industries and/or asset classes.
“It is unwise to spread one’s funds over too many different securities,” said Bernard Baruch. “Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues.”
“The more stocks you own, the slower you may be to react and take selling action to raise sufficient cash when the next serious bear market begins,” wrote William J. O’Neil in his classic book How To Make Money In Stocks. “The winning investor’s objective should be to have one or two big winners rather than dozens of very small profits.”
If you spread yourself too thin, you will compromise your results and your likelihood of beating the market. Many financial writers preach the value of index investing – just buy the whole market and be happy with being average. That’s fine if you’re aiming for average returns and don’t want to bother trying to beat the market. It’s unlikely, though, that you will be able to accumulate serious wealth by utilizing that strategy.
“No hospital wings or college dormitories have ever been named by an indexer,” said James Oelschlager, founder of Oak Associates. “They’ve been named by people who invested in one or two stocks and rode them for a period of time.”
Of course, selecting stocks for a concentrated portfolio requires a lot of analysis and attention. An investor with a concentrated portfolio needs to put the work in and must know as much as possible about their investments. They should be listening in on earnings conference calls, studying financials and tracking the business environment carefully.
“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average,” Buffett’s mentor, Benjamin Graham wrote in his seminal tome The Intelligent Investor. “Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.”
The biggest argument for diversification is protection from risk. By buying a multitude of stocks, it’s true that you’re lowering the risk that any one stock would fall and wipe out a big chunk of your portfolio. But you’re still not protected from overall market risk when the whole market tumbles.
One strategy is to buy a select few stocks in uncorrelated sectors. For instance, you can buy a technology stock and balance that with some consumer staples companies to counterbalance a higher risk sector with a more defensive one. Stocks with lower betas tend to fall less than the overall market during a downturn.
If you have a handful of stocks, you can mitigate some of the risks that will come when macroeconomic factors, such as a bear market or a recession, cause the entire market to fall. If you’re knowledgeable about the stock and believe in its long-term potential, you can ride out the storm, buy more stock at discount prices and collect dividends for income until the market turns around.
By buying and selling incremental amounts in a smaller portfolio, you can create sizable positions while ensuring that you��re not spending all your cash at peak prices. You can continue to add to these positions when there is weakness and improve your overall cost basis and returns. Even when the stock rises, George Soros thinks that if you believe in the company and their long-term prospects, you should continue to buy more, even at higher prices.
“If the stock goes up, you buy more,” said Soros. “You don’t care how big the position gets as part of your portfolio. If you get it right, then build.”
Buffett loves when the market drops, as he is able to buy more stock of the companies he loves at cheaper prices. Forbes interviewed Buffett in 1974 in the midst of a bear market and asked him how he felt. Buffett’s response? “Like an oversexed guy in a whorehouse.”
Obviously, this method of investing is not for the “set it and forget it” type of investor. Those unwilling to put the work in should probably stick to index funds. The price you pay for a diversified, actively managed mutual fund usually results in underperformance due to high fees, even if you invest in a no-load fund.
If you have a financial advisor or money manager who is a fiduciary (and you should), they will most likely be unable to set up a concentrated portfolio, so you’ll have to do it yourself. Fiduciaries are legally required to act in what they believe to be in the best interest of their clients. You’d be hard-pressed to find one who would set up a highly concentrated portfolio since it runs counter to conventional thinking.
To repeat, this strategy is only useful if you intend to put the work into acquiring as much knowledge as you can about a few select investments. This is not to suggest that you should put 80% of your life savings into Netflix stock, unless you really understand the nature of their business and have spent the time poring over their financial statements and analyzing the company thoroughly.
If you are willing to put the work in, however, you may be richly rewarded for your endeavor. Better to be like the wise man: put your eggs in one basket and WATCH THAT BASKET!
Karl Kaufman is the founder of American Dream Investing, a financial membership service. If you want to get text alerts each time we make a trade, sign up for a trial membership.
By Richard Sine
The International Energy Agency, which has dubbed 2018 the “Year of Electricity,” notes that the electricity sector now attracts more investment than oil and gas combined, and that global demand for electricity will soar over the coming decades. The threat of climate change, meanwhile, has fueled a rush toward energy production methods that don’t rely on fossil fuels. And those methods – solar, wind, hydro, geothermal, even nuclear – generate electricity.
During a lovely sunset high tension power lines run across the rural landscape bringing electrical power to the area.ISTOCK
“Electricity is the oil of the future,” said Emmanouil Kakaras, Senior Vice President and head of department innovation and new products at Mitsubishi Hitachi Power Systems Europe.
But will electric utility companies – those highly regulated behemoths with roots in the 19th century – be part of that future?
If electricity itself is here to stay, utilities are facing challenges. Their traditional revenue model – producing and delivering kilowatts through a centralized grid – is under threat for several reasons. First, renewable energy and energy storage solutions, such as rooftop solar and cogeneration, are reducing dependence on the traditional energy grid. Second, energy efficiency measures have caused utility customers’ consumption to stall, as they upgrade to appliances and remodel buildings to make the most of each kilowatt. Third, the cost of natural gas production has sunkthanks to new production techniques in the U.S., prompting utility consumers to switch from electricity to gas.
All of these trends have fueled talk of a “death spiral” for the utility sector. But “power-to-x” offers a lifeline to traditional utilities companies in today’s new energy reality. Power-to-x refers to a complex of methods and technologies that enable the storage and reconversion of surplus electric power. Among its goals are to use that surplus power to balance out energy system loads – by deploying stored energy to make up shortfalls during peak use hours, for example.
With its promise to radically curtail energy system inefficiencies, power-to-x is bringing hope to green activists and utility executives alike. The phenomenon points to a future in which utilities could provide more and more power, to the places where it’s needed, with less and less waste.
While The Sun Shines
The impetus for power-to-x started with a simple fact about renewable power generation. As Kakaras explained, “You cannot regulate when the sun is shining or the wind is blowing.” Sometimes the wind or sun might not play along with the best-laid plans of energy generators. Other times they prove far too cooperative, delivering too much energy for the grid to absorb – energy that traditional battery technology can’t efficiently store.
Power-to-x’s capacity to store that excess energy and redeploy it to where it’s needed, and at the appropriate times, could provide power generators the agility they require to adjust to a changing energy environment – if they embrace it. Among the power-to-x use cases that they might find transformative are the following:
Power-to-mobility: By IEA estimates, the number of electric vehicles worldwide will reachbetween 40 and 70 million by 2025. Building out the necessary vehicle-charging infrastructure entails significant opportunities for utilities. And electric vehicles don’t just consume surplus electricity; they can also store it and feed it back to the grid when needed.
Power-to-heat: Heat accounts for more than half of global energy consumption and is mostly produced via fossil fuels. Heat pumps for domestic heating can dramatically increase the efficiency of electrically generated heat, often making it more economical than heat from natural gas, Kakaras noted. Industrial-scale heat pumps fueled by smartly deployed renewable power could greatly reduce the carbon intensity of the manufacturing and shipping sectors.
Power-to-gas: Oil and gas have traditionally been the main feedstocks for chemicals and fuels used in industry and transport. But a process called electrolysis can convert the surplus electricity captured by power-to-x tech into hydrogen and then further convert it to methane gas or ammonia, key ingredients in manufacturing and fuels. Carbon captured from power plants can also be recycled into synthetic fuels.
How much greener are power-to-gas fuels? According to Kakaras, gasoline produced by combining the captured carbon and hydrogen produced by renewable energy emits 90 percent less carbon than gasoline produced by conventional means. And that’s just one example.
A Place For Utilities
Many of the technologies involved in power-to-x are already developed, or nearly so. As the costs of renewable energy fall and the pressures to decarbonize rise, their viability will only increase. But will utilities be in position to benefit from these valuable new revenue streams?
In a recent report, the Brattle Group consultancy urges utilities to research, develop and demonstrate new opportunities for electrification in a range of areas, including transportation and space and water heating. It also calls on utilities to educate regulators on how electrification can help fight climate change.
Developing power-to-x will also require new levels of cooperation across sectors. Utilities are already forging partnerships with electric vehicle and renewable energy providers. To develop power-to-x further, they’ll need to work closely with chemical and manufacturing firms as well.
A smart, secure, efficient and flexible grid will ultimately benefit both end users and generators alike – especially as those end users increasingly contribute to supply. In addition, it will help to hasten what key players are calling the “electrification of everything,” powering our lives in this century and beyond.
Come visit us at Electrify Europe! MHPS can be found at Booth A-L 16, Hall A, Messe Wien Exhibition & Congress Centre, between June 19-21.
Richard Sine writes about business, personal finance, and technology from Washington, D.C.
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