Note:This post is for Billy, if you are not Billy, just move on, unless you are interested in trading.Thanks

About stocks, here is my problem:

1. Because of diversification (playing it safe) I would only put a relative small % of my account into 1 particular stock. But that also means that even if that is a big winner, my overall account performance is effected only slightly. It is also true though with losers.

2. Stock in the same sector tend to move together. Thus it almost doesn't matter which one you pick in the same sector, they have the herd mentality. In case your stock moves against the sector that day, this herdmovement still effects your stock, but in this case negatively.

3. Too much work is involved when you are researching for the best stocks. Also too much energy actually trying to keep up with your choice of 2-3-4 dozens or so stocks.

So instead of stocks one can play either ETFs (index stocks) or index futures. The only difference is the leverage and the taxtreatment of them.

So let's see examples of those 3 problems:

1. Let's say I put my capital into 10 stocks just to be diversified safely. But it also increases my brokers fees. Also beside a few nice gainers I will have non-movers and losers, thus the overall performance will be, well, average of those 10 stocks. By playing an ETF I can cut down on broker fees, be safely diversified and I don't have to follow 10 different stocks.

2. I only have 1 thing to watch and predict. ETF are also very l;iquid so it is relatibve easy to get in and out, which might not be true with all stocks.

3. By playing one ETF or just 1 indexfuture, I don't have to search thousands of stocks for a possible winner. I can just ride the trend. So I can cut down on the homework and the energy that involves following the few dozens picks...

Not to mention the taxtreatment of futures is better than of stocks...

1. Because of diversification (playing it safe) I would only put a relative small % of my account into 1 particular stock. But that also means that even if that is a big winner, my overall account performance is effected only slightly. It is also true though with losers.
Diversification is the wrong strategy. If you diversify, your portofolio become diluted. The best strategy is to invest in several similar stocks. If on of them goes bad, the other one can still provide you with some income, and you don't lose too much. If you diversify, you decrease your overall profits.

2. Stock in the same sector tend to move together. Thus it almost doesn't matter which one you pick in the same sector, they have the herd mentality. In case your stock moves against the sector that day, this herdmovement still effects your stock, but in this case negatively.
Yes, but only momentarily. In both cases, you are trying to offset the negative aspect of trading. In one strategy, you do it all at the same time, by diversifying your portfolio. In the other, you do it in cycles.

The reason why diversifying is not a very good strategy is that you never have extra cashflow. If you don't diversify, you maximize your cashflow for a period and you are able to take this cashflow and reinvest. If you diversify, you never have that good amount of working capital, which decreases the amount of money available to reinvest. In other words: diversifying decreases the amount of cashflow available to reinvest, and you become unable to increase your portofolio (at least in a timely manner).

(Easier to explain with graphs... :( )

3. Too much work is involved when you are researching for the best stocks. Also too much energy actually trying to keep up with your choice of 2-3-4 dozens or so stocks.
True. That's why you don't diversify.


Not to mention the taxtreatment of futures is better than of stocks...
All that you said there was very interesting. I will take a look at this EFT thing... :p

I have a feeling you don't exactly know the meaning of diversification. Anyway, I didn't mean to play let's say gold, real estate, stocks and bonds, as a diversification, but when one plays a basket of stocks.

What you are saying playing similar stocks is also diversifying only in the same sector. Thus you might as well just play the sector's ETF, like QQQQ for the tech stocks. Or SOX for semiconductors...

0. This post is for Billy, ...
1. Because of diversification (playing it safe) I would only put a relative small % of my account into 1 particular stock. But that also means that even if that is a big winner, my overall account performance is effected only slightly. It is also true though with losers.

2. Stock in the same sector tend to move together. Thus it almost doesn't matter which one you pick in the same sector, they have the herd mentality. In case your stock moves against the sector that day, this herdmovement still effects your stock, but in this case negatively.

3. Too much work is involved when you are researching for the best stocks. Also too much energy actually trying to keep up with your choice of 2-3-4 dozens or so stocks.

So instead of stocks one can play either ETFs (index stocks) or index futures. The only difference is the leverage and the taxtreatment of them.

So let's see examples of those 3 problems:

A. Let's say I put my capital into 10 stocks just to be diversified safely. But it also increases my brokers fees. Also beside a few nice gainers I will have non-movers and losers, thus the overall performance will be, well, average of those 10 stocks. By playing an ETF I can cut down on broker fees, be safely diversified and I don't have to follow 10 different stocks.

B. I only have 1 thing to watch and predict. ETF are also very l;iquid so it is relatibve easy to get in and out, which might not be true with all stocks.

C. By playing one ETF or just 1 indexfuture, I don't have to search thousands of stocks for a possible winner. I can just ride the trend. So I can cut down on the homework and the energy that involves following the few dozens picks...

D. Not to mention the taxtreatment of futures is better than of stocks...0. -sorry it has been 4 day to get here but have been busy. Starting to spend more time at site you recommend to me (just lurking still)
1. I think diversification very important, especially when young with family.
2. My father had interesting way to express this truth: "When the whore house catches fire, all the girls (ugly and pretty) run out together."
3. When you are retired, some fing this work a pleasure. The extreme cases are the "rug rats" standing at free internet terminals most of the day following stocks. I am very big on "life long learing" so I enjoy learning now about the "magic bullets" which early stage drug /biotechs are working on, and so far it has be quite a profitable "negative tution" for me. This goes with 1. - if you are young get good pay job and save all you can - at least take 100% advantage of anythings your employer may offer at is better deal than you can do unrelated to your employment - lots of tax related things here as well as "matching funds" sometimes. When you have more money than your responsibilites require (use TERM life insurance if not yet true) then in later life you watch your account grow or shrink an not really care. - it is just a score card. - When I turn 90, I plan to eat the mushrooms I THINK I have correctly identified on walks. etc. I take risks now I could not prior to being a grand father. - If my wife would not be so against it I would buy a motor cycle! Stock borkers will tell you to become more conservative as you grow older - If you saved while you were young - you can say "to hell with that."

A. I own one ETF (I think that is what it is). First ever for me, I bought it early this month, more as a bioMedical trend indicator as CEO is very well versed in biology. - I wanted to see if he or I can select better.
H&Q Life Sciences Investors (NYSE: HQL) is a closed-end fund that invests in public and private companies in the life sciences industries. On November 9, 2006, the closing stock price was $13.20 and the net asset value per share was $14.25, representing a discount of 7.37%. today it closed at 13.59 and to owners on 17 Nov 06 it paid $.28/ shair. This and the 8% discount to under lying value made me buy.

ETFs are new things (especially to me), which I do not know much about, but they, like index funds, do provide some answer to your 1. If you can fined one in area you like, at significant discount and no "load fees" etc. sure should consider it.

B. "Never play market with the rent money." - an old but good rule. Me, I don't much care about liquidity and as many need to, this helps me get bargains. I own several Australian ADRs that do not trade at all in US for a few days. This means that when some one neds to sell my GTC "bottom fishing" buy order may get "touched off."

C. When I was working (on salary that is) I rarely held individual stocks every thin in index funds, but did even back then want protection from possible dollar decline so some were global index funds - part of my pay went into Vangualr and TIAA/cref and is only coming out three decades later as IRS requires. I did buy my local electrical company's stock so divident would roughly pay my electric bill. - Thus I did not care what the PSC did to the rates they allowed. I was very careful about money back then when I had little. - average car died at 16 years of age, etc.

D. For many years, I let tax consideration be too important factor in financial decsions, however, it is one advantage of the "buy and hold" POV in that your can defer capital gains for decades. When I was young, I thought of this as "Plan B" - If I was not rich later under Plan A, then I would take my capital gains after retirement at low IRS rate. I now need "Plan C" which is probably some gift trust* to a university as Plan A worked well.
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*with return to may grand childern years from now.

Hope that helps - must quite now without normal edit.

I have a feeling you don't exactly know the meaning of diversification.
I should. Just talked about it in finance class last week...

Anyway, I didn't mean to play let's say gold, real estate, stocks and bonds, as a diversification, but when one plays a basket of stocks.
Yes, that's a "portfolio".

What you are saying playing similar stocks is also diversifying only in the same sector.
When people say "diversification", they usually mean buying different stocks, in different sectors.

I forgot to mention one more advantage of ETFs/futures. It is easier to short them, then the average stock. There is a rule called uptick and also your broker might not be able to provide shortable stocks of your choice, but it isn't a problem with futures. and ETFs are so liquid that there is always enough for shorting.

I know searching for the next big thing can be exiting and interesting, but it is also a lots of work. moreover, once you find a candidate, you have to decide just how much of your capital you wish to risk. let's assume you are a rather careful individual, thus I don't think you would put more than 5% (max. 10%) of your capital into 1 stock. So that is a lots of decissions.

Also whenb the shit hits the fun and the market falls, getting out suddenly 10-20 positions is obviously way harder than from 1. And when the sky is falling, EVERYTHING is falling, so no matter how you diversified your stock collection, there will be no winners...

That's called "market risk". It's unavoidable, but it's also rare. Here are two examples of market risk.

In 2001, after the 911 attacks, all the stocks went down. If you owned stocks, you were screwed. If you didn't, that was a great opportunity to get into many of them.

About a month ago, in Canada, the government annouced the taxation of income trusts. All stocks were down. Once again, a great opportunity to start investing...

Market risk is not that bad. It just means that if you don't own stocks, or if you are fast enough to sell your stocks, it is a great entry point.

Here is an article: ETFs vs. futures:

http://elitetrader.com/vb/showthread.php?s=&postid=1281486#post1281486