No. of Recommendations: 38
Blackjack or Russian Roulette. For Blackjack they offer
normal odds, but for Russian Roulette they offer to pay you $1 million for each successful pull of
the trigger. If you suddenly got unlucky at Russian Roulette, would it matter how much the Blackjack
players were making?


If you are investing in 9 companies then you have 9 lives. To say that a portfolio of 10 stocks is akin to playing Russian Roulette seems like fear mongering to me!

If you invest in the S&P500 then you are investing in 500 companies. Do you think that you can pick one of these 500 (to eliminate from your portfolio) that will do worse than the average of the other 499? Very probably.

Now, can you pick one of the 499 (to keep) that will do better than the average of the other 498? Very probably.

If you do the above then you will outperform. The only reason to invest in an market index is if you just don't want to do any work.

If you talk about firm specific risk, specifically a company becoming worthless then let's look at the reasons how this might happen.

1) Fraud: Examples are Enron. Tyco. WorldCom. Theranos is another. Accounting fraud is that most difficult to detect. If the companies creditors loans cannot be serviced and the company doesn't have enough assets to leave a going concern then the shareholders can be completely wiped out.

2) Too much debt (without fraud). A company that cannot service its debts can also wipe out shareholders.

3) Companies that are financed mostly by equity and have IP, technology, market dominance have value to other companies and can usually be sold to other companies that value the IP or technology. The risk here is that investors' appetite for risk assets dries up leaving the company unable to raise more cash for operating losses. The best ways to avoid this are to raise a large cash cushion, become profitable, and continue to develop IP and technology that others will value.

We have the ability to examine companies and predict whether it's likely that they might go bankrupt. Which company is more likely to go bankrupt: Twilio or Tesla? Please don't answer because the answer is obvious.

So if you ask me which game I like, taking the average or using my own brain and doing some work to easily beat the average, it's an easy choice. But I don't consider myself an average person.

Chris
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