Don’t follow the crowd. The conventional wisdom is often
wrong. One day, the entire investment world thinks that the
pharmaceutical industry is near death. A little later, the entire
investment world thinks the pharmaceutical industry is a cureall.
Fisher remembers when Wall Street was sure that a depression
would occur after World War II. It turned out to be a
“mass delusion.”
Recognizing that the majority opinion can be just plain
wrong can “bring rich rewards in the field of common stocks.”
It’s hard psychologically to buck the crowd, of course. But it
will help if you recognize that the financial community is usually
slow in acknowledging that something has changed drastically.
(Almost all of us, in fact, feel the pain of “cognitive
dissonance” when we must change our views because of powerful
evidence to the contrary.)
• Don’t overstress diversification. It’s true that every investor
will make mistakes, and if you have a reasonably diversified
portfolio, an occasional mistake won’t prove crippling. But investors
should not try to own the most but the best.
Diversification is such an honorable word that investors
aren’t aware enough of the evils of being overdiversified. You
may wind up with so many securities that you cannot monitor
them adequately. Owning companies you aren’t familiar enough
with may be even more reckless than not having a well-diversified
portfolio. How many stocks did Fisher think was too many?
If you have only $250,000 to $500,000, he thought that as many
as 25 was “appalling.” |
