Gyroscopic Investing

MG isn't it true that most individual stocks have a lot of volatility. I wasn't suggesting especially choosing over-leveraged companies -far from it. I was simply suggesting picking one good stock from each of ten diverse sectors. The stocks could be chosen primarily on the basis that they had almost no chance of bankcruptcy. What mining company, oil company, bank, pharma, computor, supermarket whatever doesn't have plenty of price volatility? I'm just talking about making full use of the inevitable volatility that even the most solid stocks exhibit.

stone wrote: MG isn't it true that most individual stocks have a lot of volatility. I wasn't suggesting especially choosing over-leveraged companies -far from it. I was simply suggesting picking one good stock from each of ten diverse sectors. The stocks could be chosen primarily on the basis that they had almost no chance of bankcruptcy. What mining company, oil company, bank, pharma, computor, supermarket whatever doesn't have plenty of price volatility? I'm just talking about making full use of the inevitable volatility that even the most solid stocks exhibit.

No, its not true.  If you look at the "beach front property" stocks, they don't have a lot of volatility.  And when combined in a portfolio, their collective volatility will be muted even further.  For example. "beach front property" Proctor & Gamble has a beta of .30 whereas "prom queen" Apple has a beta of 1.04.  Or "beach front property" Coca Cola has a beta of .44 whereas "prom queen" Google has a beta of 1.13.  With a collection of low beta/low volatility "beach front property" stocks, they will be collectively less volatile than even a S&P index fund which has a beta of 1 by definition.

MG

Machine Ghost, I wasn't saying just have consumer staple stocks. I was saying have a solid stock from each sector. So have a solid computor stock, a solid oil stock, a solid pharma, a solid consumer staple etc etc. Even if the overall beta of the collection of stocks was just about the same as that of a cap weighted index, rebalancing against LTT, cash and gold would still be more effective than with the cap weighted index. Think back to when the stock bubble was happening in 1999. The cap weighted index in the PP was rebalanced out of. That made sense but it would have made much more sense to have just sold off the tech sector and not stocks such as Coca Cola that were not participating in the bubble. Similarly with the ballooning banks in the FTSE 100 leading up to 2007 or the ballooning miners just after that. Why sell off miners when tech stocks bubble or sell off pharma when mining stocks bubble? Using a cap weighted index causes the baby to be thrown out with the bathwater.

The folks managing the index funds will charge higher and higher fees due to the higher demand for them..

Everyone would be perplexed and asking themselves, "why is nobody buying this or that clearly under-priced stock, and why are the stocks of some bankrupt companies trading at a premium?"

There would also be a lot of whining from Socially Responsible Investors about the good old days when they used to be able to exclude certain stocks.