Full disclosure: including mutual funds, RRSPs and other investment vehicles, I hold a total of $0 in the stock market. This is not an indication that I do not believe in the stock market, I do – Warren Buffett happens to be one of my favourite authors and economic philosophers. Rather, it is an admission that I do not understand the stock market, and am therefore heeding Mr. Buffett’s advice when he cautions investors to define your circle of competence and do not invest outside of the perimeter. My circle is small, and the stock market isn’t in it. Consequently, diversification in my case means that I have a real estate interest on more than one street.
Nonetheless, opportunity, or more accurately, greed, occasionally gets my attention when I see that the stock market has plummeted, which, as of the moment of this writing, happens to be the case. Both common sense and your stock broker would suggest that a pummeled stock market provide buying opportunities for the brave. Executing the purchase of a triple A stock that has lost 25% of its value however, quickly reminds me that perhaps I am only greedy, and not brave. It sounds good in principle, but having the guts to pull the trigger is unlikely for most, and certainly for me. If it were easy, everyone would be wealthy. I will therefore remain on the stock market sidelines gathering what if stories to share at a later date.
We have all been cautioned not to put all your eggs in one basket so early and so often, that we accept the advice as a self evident truth. But what I would ask, if you happen to know that you have one very good basket, and a couple other baskets your next door neighbour’s boyfriend recommended that you really know nothing about? Does it make sense to take your eggs out of the good basket that has safely and competently carried your eggs for years, and place them into the ones you know nothing about? Warren Buffett has an answer for that as well. Diversification is protection against ignorance. It makes little sense if you know what you are doing. He also likes to say that his preferred holding period for an investment is forever. Happily, the real estate basket keeps your eggs fresh for a long long time.
As for the baskets my next door neighbour’s boyfriend recommended, I just don’t know enough about them to entrust them with my eggs.
Thanks for reading,