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URL:  http://boards.fool.com/jack-thanks-for-your-as-ever-thoughtful-reply-23732050.aspx

Subject:  Re: Thinking About Diversification Date:  2/20/2006  3:49 PM
Author:  imdajunkman Number:  15473 of 36195

Jack,

Thanks for your, as ever, thoughtful reply and your pointing out, graciously, something I was overlooking, i.e., the need to advance stepwise toward understandings for the benefit of newcomers to the conversation.)

Yours is a centrist approach, which has proven its usefulness. Mine is to consider the peripheries on the assumption that a theory has to handle all cases, so I might as well deal with the most extreme ones first. Hence, my trying to defend something like a one-bond portfolio forces me to deal with problems that are going to be common across a portfolio of any size and allows me to avoid dealing with problems that are size-dependent. So, it's a modeling technique; it's an investigative tactic.

But I would argue that the approach has real-world pay-offs. A beginning bond investors likely have a limited amount of capital and knowledge and the very first thing they will nearly universally hear is that they don't have enough capital or experience to do their own bond investing. So my approach is to de-emphasize the need for capital and to de-emphasize the utility of getting investing knowledge from others. The majority of offered advice and knowledge (including everything I say) is worthless, for several reasons.

(1) All most no financial advisor, newsletter writer, market commentator, etc. is making a living from their investing efforts. They are generating their income from the wages, fees, etc. they are extracting from sales of their products or services. The sooner a beginning investor learns that he is really on his own, the sooner the real learning can begin.

(1) No one can trade another man's game. Every investing approach, ultimately, is unique in its goals, strategies, and tactics for the reason that each human being is unique. Solipsism is the fundamental characteristic of investing/trading. So, once again, the sooner a beginning investor learns that he is really on his own, the sooner the real learning can begin.

(1) Therefore, every single definition has to be questioned and rewritten in terms of the investor's own experiences. Every exiting tool has to be tested before use. Every formula and calculation has to be verified.

That more responsibility than most people want to accept. That's more work than most people want to do. And I don't blame them one bit. Just getting through a normal workweek is job enough without taken on the task of also becoming a self-directed investor. But the costs of not doing one's own thinking can be horrendous, as people found out after March 2000, and as people are likely to re-discover going forward. So, it becomes a Catch-22 situation. OTOH, they are asked to believe that they don't have enough capital and knowledge to begin the learning process. OTOH, they really don't have enough knowledge to know that they really do have enough knowledge to begin the learning process.

Therefore, I prefer to tell them this:

Yes, you do have to keep yourself out of trouble, because if you get yourself thrown out of the game, you won't be able to learn the game. But the game you are going to have the best chance of winning is the game you create for yourself. Therefore, you want to be the one who's writing the rules. Therefore, you had better learn how to build games and how to test rules, and one of the key problems you're going to be dealing with is Diverisfication. You need to understand what you mean by the term, operationally, within the context of your own investing activities. No one else's ideas matter. It's your money and portfolio, not theirs.

Charlie

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