Mutual and Exclusive Investments
Fumbled Mumblings has an interesting post on mutual funds. I know little about them, and have tried to focus investment on areas of which I have some relative understanding. (For example, I have avoided investing in real estate because I don’t understand the market forces affecting real estate prices, rental income, and so on. I will consider it as an investment in standard of living, and on that I have some idea of what would be a better “investment” for myself.) I’m in a relatively unique position of being able to invest in something I understand better than probably anyone else in the entire world, and so having a relatively good idea of whether it’s a good investment or not. Most people aren’t in that sort of position, but most people do have expertise in some area or another, that would probably allow them to better understand or read an industry and spot potential. When I was about 11 years old, I remember making a list of companies I would invest in if I had capital - because I was a relative expert in computers and so on. If a venture capitalist had invested in Anthony Holdings Corp. back then, he would have made a very good investment. The other thing to keep in mind is the concept of company “fundamentals” (associated with what I have called “real wealth”). If you think of markets as Mel Gibson-not-on-medication, you will avoid rapid oscillations of feeling good or bad about the fundamental processes occurring behind the scenes - if you in fact understand how those companies work, where their growth is going to come from, and so on.
23. March 2009 at 14:34
Thanks for the mention!
“Investing in what you know” is a double-edged sword.
On the one hand, as you point out, you can use your “inside information” to make better judgments.
On the other hand, this style of investment will often result in a dangerous concentration of assets. I’m specifically thinking of someone who invests in companies in the same field that they work in (or starts a company!). This is great until the sector collapses and they lose both their job and investment portfolio.
None of which excuses people from learning about what they want to invest in, of course.
26. March 2009 at 10:37
(The following are more questions than claims - I don’t pretend to know a lot about investment and risk at this point.)
Right - broadening the categories of investment will reduce the risk of sector-specific collapse. Having said that …
“[investing in what you know will often result] in a dangerous concentration of assets.”
If it’s dangerous, though (high “risk”), then clearly you don’t really understand that sector. (?)
You seem to be appealing to some higher-level general risk factor which may or may not exist.
The question I have is to what extent this is really a “risk” relative to the alternatives. For example, mutual funds are vulnerable to general upward or downward trends that sector-specific strategies may be less vulnerable to. Each strategy has a risk associated with it. (?)
28. March 2009 at 22:10
I’m more concerned about the “unknowable” kinds of risks that concentrated investments bring.
For example (to borrow a topic from Double Blind), you could be an expert on oil, hell, an expert on energy in general, and still get blindsided by someone developing cold fusion (or even regular fusion) 20 years earlier than expected.
4. April 2009 at 01:24
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