Investing in individual stocks is a weirdly crazy ride. I only do it with play-money levels on the side of bulk of portfolio in index funds, but when they do well, your "play money" level suddenly gets very serious and you are no longer primarily a passive investor.
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There's also periods when passive and active turn into almost the same thing because a few big stocks doing really well while others are doing badly means they dominate the index. Which means if you also hold a position individually, you're overindexing what's already indexed
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It's like an evolutionary bottleneck for the economy, where everything is under extinction stress from an asteroid or something, so investing in the few individual species that might survive is the same thing as investing in entire biomass in proportion to survival expectations
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Venkatesh Rao Retweeted 𝔻𝕒𝕧𝕚𝕕 𝔸𝕝𝕝𝕖𝕟
My thinking: An index by definition is a bet that the future will be like the *present*, and current distribution of wealth will self-perpetuate. When the future is not like the present, it's often just a handful of companies making it different.https://twitter.com/mdavidallen/status/1280561841241042961 …
Venkatesh Rao added,
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So if you believe "software will eat the world" then eventually the S&P will get there with increasing dominance by tech stocks (as is slowly happening). If you want to get a time advantage, you do a spot of speculative execution, take on risk by adding more tech than S&P does.
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Diversification is limited by the fundamental diversity of surviving things. When an ecosystem goes through an evolutionary bottleneck, temporarily the maximum diversity will plummet as there's a big extinction event (in biology, historically to the tune of 90%)
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If for example, before Covid, you held 95% S&P and 5% AMZN, and 5% is your "play" level, that ratio is now seriously out of whack, and you have to consider dumping some AMZN to buy S&P *or* redefine "play" for yourself (= "risk tolerance"). Is post-Covid future Amazonian?
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15y ago I was 100% passive index funds. Only in last 7y or so have I allocated "play" money to big tech stocks. It's done unreasonably well so I have to either reassess or rebalance. Is Burton Malkiel still right? Or is passive investing going through extinction bottleneck?
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Though this mix of hot sector and a pandemic shock that's aligned with its fundamental trends is weird and new. It's accelerated schedules a lot.
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