During his recent interview with Excess Returns, Guy Spier explained how investors can take out stupidity insurance to protect their portfolio. Here’s an excerpt from the interview:
Spier: It’s trying to figure out how do I decide my circle of competence in such a way that I rule out those versions of the world, or those versions of me, that will hit rock bottom, so that clearly goes to concentration.
So these people who want to run a seven or ten stock portfolio I mean that’s great but you know losing 10 percent of your portfolio in one company is… can be devastating.
It’s happened to me once, you don’t want to do that too often in your life. So one simple decision is I’m going to run a portfolio of 20 stocks.
And yes that’s going to limit my upside. Warren Buffett said if you run 20 stocks you know you can’t know as much as the 18th best idea in your portfolios, you can know about your first best idea in the portfolio.
And my answer to Warren and anybody who tells me otherwise is yeah but I’m buying insurance against the possibility that I’m stupid.
And I’m also buying insurance against the possibility that I don’t know actually what my circle of competence is or I have a misunderstanding of it.
And I’m also buying insurance against the possibility that I’m so freaking arrogant and narcissistic that I think I’m a genius, but actually I’m not.
And so why not just do 20 stocks. What’s the end of the day compared to the guy who did 10 stocks? Yeah maybe I’ll end up less rich but is that a terrible outcome.
It’s far better… I’d far rather have an outcome that is where I get pretty rich than to have an outcome where I could get fabulously rich but I could get to zero.
You can watch the entire discussion here:
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