≈ The Agony and the Ecstasy ≈
There are two paths to investing for the long run in the stock market. The first is diversified; the second is concentrated. You can buy the entire market through an ETF or mutual fund, or you can buy individual stocks. The former is easy and guarantees you get what the market is willing to give. The latter is far more difficult than it first appears. For every Apple that goes on to take over the world, there are a dozen or so could-have-beens that get beaten into oblivion.
In a recent update to their research report titled The Agony and The Ecstasy: The risks and rewards of a concentrated stock position, J.P.Morgan provides some compelling stats on just how many public stocks end up suffering catastrophic losses.
Check out this gem: “More than 40% of all companies that were ever in the Russell 3000 Index experienced a “catastrophic stock price loss,” which we define as a 70% decline from peak levels which is not recovered.”
In case the implications weren’t clear, a large portion of the stocks available to trade in the public markets will suffer catastrophic losses. Sure, some will go on to dominate and become giants, but they are the outliers. Can you identify them ahead of time? Few can.
This is one of the more compelling statistics I’ve seen that illustrates why betting on a single stock is so risky.
Chart of the Day
When Catastrophe Strikes
44% of all the stocks in the Russell 3000 experienced a 70% decline without ever fully recovering. Think about that next time you’re tempted to invest a large sum into a single stock position.
Video of the day
Buy, Hold, Dump
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