BOOYAH! Investment ClubコミュのBOOYAH! Be Diversified (From 2/5/06 Newsletter)

Dear BOOYAH! Investment Club Members:


BOOYAH! We talked about three major indices in the last newsletter. The Dow was moving toward 11,000 through the week but failed to reach that point again. On January 31, the Federal Reserve Chairman, Alan Greenspan, retired his job and the new Fed Chairman, Ben Bernanke, took over the job. The Fed’s job is to control the short-term interest rates and the rates are currently at 4.50% after a 15-straight interest rates hike. If the interest rates’ hike are about to finish, investors like to own a lot of financial stocks (I will discuss about this in the upcoming newsletter), but rational investors never own all financial stocks in their portfolios. Investors need to diversify their portfolios, ALWAYS. Being diversified, your risk will be minimized. Let’s talk about diversification now. Are you ready, SKEEDADDY!!!

Jim Cramer said, “diversification is the only free lunch” on his book, Jim Cramer’s Real Money: Sane Investing in an Insane World. It’s true. If you diversify your portfolio, your risk of investing will be minimized.

Warren Buffett, who has invested in the Coke stock (Coca Cola: KO), said keeping all the eggs in one basket when riding a bicycle was not a good idea. If the bicycle bumped on the way, all the eggs in one basket would be damaged. However, if you put eggs in different baskets, say 5 different baskets, and each basket has 5 eggs, and then you ride a bicycle to go down a bumpy street, I don’t believe all the eggs will be damaged. At least, 3 baskets will be survived.

Owing stocks is like this. I don’t want you to own 100% in one stock, say put all of your money in Apple Computer, whose stock skyrocketed more than 80% in last one year. It’s too risky. Apple may face a strong competition, for example, from Sony (SNE) and the Apple’s market share may fall and, very sure, the AAPL stock price falls very quickly.

Also, I don’t want you to own Microsoft (MSFT), Intel (INTC), Yahoo! (YHOO), Google (GOOG), and Apple Computer (AAPL) in your diversified portfolio. They are all in the same tech basket. It is not the diversification. I know if another tech bubble happens, all of these stocks will nose-dive and need to wait get recovered from the peak. The share of Yahoo! peaked at $100 in 2000, but it fell to only $5 a share in October 2002. You had a 95% loss if you sold it in 2002. Not only YHOO, but AAPL, MSFT, INTC, and all techs fell sharply, like YHOO at that time. That’s why diversification is very important and if you diversify well, you will be one of the winners in the stock markets.

Jim Cramer and Warren Buffett like diversification. Diversification is the key to success in investing. Be diversified, ALWAYS!

Sincerely,

Akira Kondo



Correction: I made a stupid mistake in the last newsletter. I said, “DJIA, NASDAQ, and S&P 500 are called indexes.” It is not “indexes.” It should be “indices.” The plural form of “index” is “indices.”


Warren Buffett is the Chairman and CEO, Berkshire Hathaway. He said, “When you get out of bed in the morning and think about what you want to do that day, ask yourself whether you’d like others to read about it on the front page of tomorrow’s newspaper. You’ll probably do things a little differently if you keep that in mind.”


PS: I plan to start posting what stocks I buy and sell on the BOOYAH! Community in the MIXI. I love disclosure. Disclosure is the way for corporations to success in their businesses because investors can know more about corporations. Hopefully, I can start by the middle of February.