Originally published February 23, 2007
Diversify, diversify, diversify.
Special thanks to our real estate collegues for allowing us to modify their well known mantra. And in a homage to one of my favorite movies, Dodgeball, I give you the extended mantra, better known as The Szelhamos Five D’s of Wealth Creation.
For those who can’t continue with the suspense, they are: DIVERSIFY, DIVERSIFY, DIVERSIFY, DIVERSIFY and DIVERSIFY.
Diversification should extend to nearly every single aspect of your financial life. Of course, everyone knows that your portfolio should be diversified. But is that it? Is that the end of the story? Will there be other rhetorical questions? Is having 5 stocks in different sectors all there is to diversification? By the time we finish with Diversification, you should be thinking about multiply managed investment accounts, multiply chosen and strategically used credit cards, multiple banking accounts linked through the modern miracle know as “The Internet”.
Look, maybe sometimes it makes sense to consolidate. Maybe there’s value to be had if you get your Cable TV, telephone and internet service from a single provider. Maybe there’s money to be saved if you bundle commodities, because that’s what those are. They’re not going to make you any money, although they may save you some cash.
But we’re talking about making money. Making wealth.
Anyone who watches Jim Cramer’s “Mad Money”, and who doesn’t these days, knows how he consistently emphasizes the need to be diversified. A basket of non-diversified stocks, even in great companies, is a recipe for disaster. Want proof? Look at the roller coaster rides taken by so many specialized indices, ETF’s or mutual funds. You know what your luck is like, don’t you? So don’t gamble on being lucky and catching a high flying sector at just the right time, and then getting out just at the right time. It ain’t gonna happen.
But there’s more to it. I think the world of my financial advisor, Bob Shapiro, I have followed him from E.F. Hutton, to Paine-Webber and now to UBS. He has complete discretion over my account, and he has never let me down. But he is not the only person making investment decisions about my portfolio.
Let me first tell you something about Bob. In all the year’s that I have entrusted him with my assets, you do the math, when did E.F. Hutton vanish into the ether, he has never attempted to thrust me into a position that did not reflect my risk profile. He did not push the house’s proprietary, high mark-up products, and he didn’t inundate me with telephone calls and solicitations. How many of you can say the same thing about your financial advisor? Oh, and by the way, his investment returns have not been shabby, either. Obviously, there has to have been more to it, than just personal allegiance.
So why have I not entrusted all of my eggs to this rock solid advisor? For those of you that are a little bit slow on the uptake, the answer is: DIVERSIFY, DIVERSIFY – you know the rest.
So how do you diversify? If you don’t have a good financial advisor, start with Bob Shapiro and his investing group. Other than my long standing investing relationship with him, I have nothing to gain from sending business in his direction. I haven’t even asked him, nor told him about this piece, but if you do call him, please drop me a line at firstname.lastname@example.org.
Anyway, I’m a little off topic. As much as I admire Bob, for the person and professional he is, I really like investing, so I entrusted some of my funds to myself. How daring was that? In hindsight, it has not been overly daring, thanks to low on-line commissions, great internet sources of data and my own penchant for semi-hedging via options related income, as I regularly sell covered options (more on that in another file).
What was more daring, however, was entrusting some newly found funds, from an inheritance, to a financial advisor at another firm, Paine-Weber. Granted, he had managed the very boring portfolios of risk-adverse relatives, but it was really hard to say how he would do with an account that was accepting of an appropriate level of risk. To put it in a nutshell, the managed account with Eric Book, who by the way is in California, while Bob Shapiro is in New York, has done quite well. I was prepared to give him a one year trial and compare his results, net of expenses, to the appropriate comparison index. Knowing the vaguaries of the market, it’s unfair to just look at your investment return as an isolated snapshot. Even the Szelhamos snapshots you see so prominently displayed don’t adequately portray the man. There was so much more to him. So too, is there more than just the cold numbers of your investment returns. And with that in mind, Eric has done quite well, utilizing a very different investment approach than either Bob or myself.
Whereas Bob invests in a limited number of companies, with the average investment at time of purchase equal to almost 4% of the portfolio, and generating dividends of approximately 2.5%, Eric’s average investment at time of purchase is only about 1.2% of the portfolio and generates only about 1.3% dividends. In other words, Bob’s universe of stocks is about 25, while Eric sees fit to cram 80 stocks into the portfolio. Mind you, in dollar terms, Bob’s managed portfolio is nearly 60% larger than Erics!
How about my own style? Is it more of the same? Well, I have different styles for different accounts. Retirement tax deferred style, discretionary account style and a kids’ portfolio style. What ties these all together is the habit of selling and buying back call options, ad nauseum. Only the discretionary account generates much dividend activity. Each stock in the retirement account represents about 8% of portfolio value, with perhaps a 0.5% dividend rate, but another 4% in options income. The kids’ account, has an average stock representing 15% of the portfolio, no dividends, but great options income. Volatile stocks, albeit in a mix of solid and speculative companies, will do that. Have you seen the near term call options premiums on Apple (AAPL), T
he New York Stock Exchange (NYX) or Google (GOOG). How I love Google. I’ve held it for a year and have turned it into a 3% dividend paying stock. The discretionary account, you ask? Solid companies, good dividends, the occasional options writing.
Diversification. Very different styles, but also by very different individuals. These portfolios rarely move in tandem, but put them together, in an actively managed fashion and the peaks and valleys are smoothed out, resulting in a cumulative slow, but steady climb upward.
Okay. Enough already. There’ll be more on Diversification to come. Stay tuned.