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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.
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Replying to @vgr
why would one buy an individual position that's already held in a diversified fund? (For this reason) unless over-indexing is the point. Perhaps you want exposure to S&P 500 but more to specifically 1 company because (reasons)
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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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No definitely not space. Something like energy/renewables. But it's hard to figure out. I bought a bunch of lithium stocks a few years ago and they've done really badly. My thinking is higher up the new energy stack... cell/battery/powerpacks...
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