Exclusive: Jim Rogers on How Many Eggs You Should Put in One Basket - Vivek Kaul's Diary
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Exclusive: Jim Rogers on How Many Eggs You Should Put in One Basket

Dec 9, 2016

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Diversification is generally considered one of the basic tenets of investing and financial planning. Owning a mix of assets, ideally with a low correlation - including, stocks, bonds, real estate and gold, for example - is Investing 101.

That is... unless you're one of the world's most famous investors.

I recently sat down with Jim Rogers and asked for his thoughts on global markets, what he's buying now, where bubbles might be forming and... asset allocation. (I'll very shortly tell you how you can see this entire video - Jim Rogers unplugged.)

Jim doesn't buy into the cult of asset allocation.

"Well, I know that people are taught to diversify. But diversification is just that's something that brokers came up with, so they don't get sued," Jim told me. Then he added, "If you want to get rich... You have to concentrate and focus."

This obviously goes against conventional thinking. But this kind of thinking is what made Jim one of the world's most successful investors. He co-founded the Quantum Fund - one of the world's most successful hedge funds - which saw returns of 4200 percent in ten years.

He quit full-time investing in 1980 and went on to travel the world a few times. He also wrote several books about what he saw and learned. Even if you're not a travel or money junkie and know little about finance, these are some of the most educational and entertaining books you'll ever read about investing.

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Why (maybe) you should diversify

I've also written about the importance of diversification to reduce risk in your portfolio. As the saying goes, don't put all your eggs in one basket. But you also need to make sure they're not all on the same egg truck, either.

Diversification can limit the risks that are specific to a company or industry. For example, bad (or fraudulent) company management is a firm-specific risk. An airline employee strike, which has an industry-wide impact, is an industry risk. These are called "diversifiable risks" because they aren't directly related to the broad financial market system.

Market risk (also called "systematic risk" because it relates to the financial system as a whole) is unavoidable for anyone investing in financial markets. Market risk is affected by things like interest rates, exchange rates and recessions. Diversification can't touch market risk.

The graph below shows these two types of risk. Every investor is subject to systematic risk. Diversifiable risk is higher if a portfolio includes a small number of holdings. And diversifiable risk declines as the number of holdings in a portfolio increases - to a certain point. Having a portfolio with five securities definitely beats a portfolio of just one security. But diversifying beyond 30 securities doesn't bring any additional benefits in reducing overall portfolio risk.


But Jim Rogers disagrees. "The expression on Wall Street is, don't put all of your eggs in one basket. Ha! You should put all of your eggs in one basket," he told me. "But be sure you've got the right basket and make sure you watch the basket very, very carefully."

Now, of course this strategy of putting all your eggs in one basket... but making sure it's the right basket, is not for everyone. It's a high risk, high reward strategy.

And Jim acknowledges that. "If you don't get it right, you're going to lose everything. But if you get it right, you're going to get very rich. And by the way, don't think it's easy getting it right. It's not easy. It takes a lot of insight and work and everything else. But, if you get it right, you'll be very rich."

Jim shared a lot of other insights with me... I'll tell you very soon how you can see this exclusive video.

Please note: This article was first published in Truewealth Asian Investment Daily on 08 December, 2016.

Kim Iskyan is the founder of Singapore-based Truewealth Publishing. He has spent most of the past 25 years exploring and analyzing global markets. He has been a stock analyst and research director for a big emerging market investment bank, managed a hedge fund, and sold mutual funds to private bankers. He has advised Fortune 50 companies on political risk and helped build stock exchanges from scratch in countries that few people could find on a map. He has lived and worked in ten countries, from Spain to Russia to Sri Lanka to the United States.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Exclusive: Jim Rogers on How Many Eggs You Should Put in One Basket"

KD

Dec 12, 2016

Most of the very successful business people I know, almost got bankrupt at one point of time. This is high risk and high reward game.

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