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« CONTROL PREMIUMS & STOCKHOLDER DIVERSIFICATION | Main | THERE IS NO ACCOUNTING FOR STOCK OPTIONS »

January 14, 2006

Comments

Ann

You've explained very well why the average investor with no information should fully diversify. But I think you're going too far by saying that it is irrational for anyone to ever be less than fully diversified. What if an investor believes that a particular stock or industry is undervalued? Diversifying away that individual or industry risk may be very costly and suboptimal in that case.

To argue that all rational investors must at all times be fully diversified, you need to argue that no investor ever has information. But then how does "the market" get information? Do you know of any model that predicts that prices will be efficient even though no investor ever trades on information? Noiseless models with endowed information don't count, since they're clearly unrealistic for this purpose. Have you seen a model where it takes time and effort to figure out how much a stock is worth, and yet prices are always efficient even though no one ever puts in that time and effort? Does this make intuitive sense?

If you're just giving general advice for the average retail investor, that's fine. I agree with the idea that small retail investors in general don't have the resources or the training to compete with institutional investors (although they still might choose to invest in and follow a few stocks, if they enjoy it; this might be rational in the sense of utility-maximization). But you seem to be arguing that all rational investors must always be fully diversified, and I don't understand how this can work in practice.

mlgreen8753

I totally agree. That's what I have been saying all along. I am diversifying my asset classes. Eventually, I will do the same within the stock market, but right now I am only looking at Mentor Capital (MNTR), a stock I discovered at http://breastcancerinvesting.com/investor.shtml

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Wem soll ich wu"nschen Frohe Ostern?

Allen eigentlich die diesem Forum lesen und schreiben Vielleicht Auch.

Na gut, es gibt ein Paar Vielleicht Ausnahme.

Pelzlose Dauergru"nhinterdenohrenhasen, die schnell Feierabend gemacht haben, weil sie sich selbst ertragen nicht mehr und leben wohl jetzt konnten in der Grube.

Wie immer ... AUCH

Hort auf, das zu Ostern oder den Hunden und Katzen Osterhasenohrenprothesen kommerzialisieren anzukleben.

Geliebte und der Nachbar Hobbyja"ger Schiesser drauf sonst ko"nnte.

So schreibt hier im Forum und ab und zu was wrong.

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