California-based portfolio manager and pundit Kris Abdelmessih made a terrific point in a column called The Diversification Imperative, advising investors to protect their portfolios for their future selves.
Mr. Abdelmessih is a fervent believer in diversification and he states this belief in no uncertain terms, “If you are not diversifying you are incinerating theoretical money in terms of expected risk/reward.”
The author argues that investor regret is one of the biggest hurdles investors must overcome when committing to diversified portfolios. Investors will always, in other words, look back and wish they committed all of their assets to the top performing stock or asset classes.
We all do this. I just calculated that US$1,000 invested in Apple Inc. on March 9, 2007 would now be worth $32,453. If I’d only put all of my savings in Apple on that specific day I’d be comfortably retired right now, living in a bespoke beachfront villa on St. Lucia. It’s nice to think about.
While completely normal, this type of regret feeds bad investor impulses. We are tempted to search for the next big winner, and allocate way too much of portfolio assets there. The odds of winning big this way are better than the lottery, but not by a lot.
Mr. Abdelmessih recommends that investors write down their top three stock ideas – the ones they’d be tempted to overweight in their portfolios – and revisit them after a few years. The odds are highly slanted towards those stocks underperforming the market by wide margins. This process will help curb the financial dangerous tendency to try and pick individual winners.
The key takeaway for investors is that there will never be a time when they don’t look back and wish they’d rolled the dice and won on a single stock. This does not, in any way, mean that a widely diversified portfolio isn’t the best path for all portfolios over the long term.
-Scott Barlow, Globe Investor markets strategist
Stocks to ponder
K92 Mining Inc. (KNT-X). On a year-to-date basis, the share price is up 86 per cent and the stock has a unanimous buy recommendation from 11 analysts covering the Vancouver-based exploration and junior mining company. Given the spike in the share price, growing analyst coverage, and the need for capital to fund management’s stage 3 expansion plans, Jennifer Dowty says in this story that she would not be surprised to see the company raise money in the financial markets. (Globe subs only)
Tesla Inc. (TSLA-Q) Retail investors around the world, staunch believers in the company’s mission to lead the auto industry into a battery-powered future, have invested their personal money, and at times their parents’ retirement funds, in Tesla and reaped handsome rewards. Tesla reports second-quarter results on Wednesday after the close of trading. While analysts polled by Refinitiv on average expect the company to report a loss, a surprisingly strong vehicle delivery report boosted hopes among many retail investors for a profitable quarter. (for everyone)
Nervous about the rally? Here are some places you can look
A number of unloved stocks look especially cheap right now and they should appeal to anyone wondering why the S&P 500 is essentially flat this year amid surging unemployment, record-breaking U.S. COVID-19 infections and tremendous uncertainty over corporate profits. David Berman reports on three of them.(Globe subs only)
How to profit from the surge in global cycling
When demand exceeds supply, smart investors start looking for the beneficiaries of this situation, and with a global market approaching $50-billion, the bicycle industry should offer some tempting opportunities. Robert Tattersall investigates in this story. (Globe subs only)
Proposal to ban short selling ahead of deals to shake up junior markets
A move to bring Canadian short-selling rules in line with United States securities law could reverberate through Canada’s junior capital markets as regulators look to limit a controversial trading strategy used to finance high-risk companies, notably in the cannabis industry. Mark Rendell has more. (Globe SUBS only)
Others (for subscribers)
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Ask Globe Investor
Question: I have access to different analysis on stocks, including Morningstar, Argus, Thomson Reuters, and TD. They all suggest target prices on stocks, most of the time higher than at present, and they very rarely suggest selling. These days, it is very easy to find reports suggesting returns of over 50 per cent for the next 12 months. What is the value of these reports? They all seem to be based on a coming return to a normal economy and they all seem to forget about the risk of the current context and recession. These reports are prepared by competent and honest people. But I do not know to what extent they can be useful for investors.
Answer: There are many divergent views of stocks these days, because of the tremendous uncertainty we face. These reports can provide useful insights but read them carefully to see if they make sense in the context of your own knowledge and objectives. Forget about price targets – I think they are meaningless right now. Rather, look for references to strong balance sheets, dividend sustainability, and growth potential in the current environment. That will help you to decide which reports have credibility in relation to your personal requirements.
What’s up in the days ahead
Gordon Pape takes a look at a company that’s helping to keep supply lines open during the pandemic. Not surprisingly, its stock is on a roll.
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Compiled by Globe Investor Staff