Smart Investing

I love investing money for myself and my clients. It's always challenging and changing and, at times, very humbling.

But in the past month I've heard some very sad stories of investors who had most if not all of their investment in one company. Now you may say how foolish that is to have all your money in one company, and they should have known better. But how does this happen? It could happen to you or someone you know. Why?

The one thing that I think destroys investment returns more than anything else: emotions. In the recent past as the markets were falling, I was talking about what a great time it was to buy, which has now paid off very well. Yes, there are still those saying it's going to go back down. I'm not sure what they are looking at -- more than likely it's an emotional call, but the numbers say the next six to 12 months should also be pretty good. But emotions also can blind investors to diversifying.

Can you imagine coming into my office with your portfolio and I say, here's what you should do: invest your entire portfolio into this one company. You would think I'm crazy, but I would say, no wait -- you don't understand, this is a strong company; you know the name; they have been around forever; have paid a dividend since 1942; and for the past 10 years, the stock is up 500 percent. This is the best opportunity for you, and where's the risk?

Sounds pretty dumb when you listen to it, but there are investors who had all their money in WorldCom, Enron, Citigroup and GE, along with many others. How could this happen? Why is it that the same investors who would walk out of any financial adviser's office who recommended to put all their money in one stock get burned by having all their money in one company?

They fall in love with the stock they own, and love -- which is a great emotion to have in a human relationship -- does not work in investing.

I'm sure you've heard the saying, love is blind. Do you know anyone who is in a relationship with some loser and is blind to how bad he or she is being treated? Did you ever try to talk to that person about how bad the relationship is and you end up being the bad guy or girl, and many times your friend will no longer talk to you and stays in that bad relationship? As bad as that relationship is, it makes the person feel good.

The same is true for those who end up holding primarily one company in their portfolio. What happens is that they may start buying some of that company and it does well, so they buy more. Investors see that the dividend has increased and now their yield is higher. There is a pullback on the stock and wow, six months later it is higher than before. A year later it happens again, but the stock rebounds, and again is higher than before -- and now you realize that this stock never goes down and stays there, it always rebounds. So you continue to buy more and sell your other companies to move into this winner that you have that has never let you down.

You're now in love with this company and are blind to the basic rules of investing to stay diversified -- don't put all your eggs in one basket. Common sense, but just like the personal relationship, love is blind to all common sense.

Maybe I should start a program for the addiction of overconcentrated portfolios called Overconcentration Anonymous. Over my 25 years of investing, I have come across too many of these addicted concentrated portfolio investors. I have saved a few but not enough. Maybe I need to start a 10-step program to help.

Don't let this happen to you or someone you know. Try to get the education on investing that is needed by reading and listening to real investment advice. I try not to blow my own horn too often, but this is one of the big benefits I give to my clients, and that is the unemotional investing that I do. It has worked for hundreds of years and the same philosophy will work for hundreds of years to come. Do a lot of research; buy low/sell high and stay diversified.