Also, while the premium you earn protects you a little from very slight downward movement that – at least, to me – is hardly suitable for this market

I am having mixed success with naked PUTS and CALLS (buying, not writing) at the moment … but, I am ‘gambling’ very small proportions of my portfolio.

On the other hand, in a volatile market as we have at the moment, for the brave, a naked options trading strategy is actually ideal (even though I would normally recommend against it).

“If I was hoping for a return on the tail end of the upper extreme, I would want to know how likely it was for me to receive the extreme upside return (so I know what I was going to give up by investing the SP500). I would also want to know what returns are “most likely” to occur over the next 43 years–not just a comparison of the extremes.”

That is of course the $20M question!!!! But, the skewed rates of returns means you have a much greater chance to outdo the index than to underperform the index!

I ask myself why, when you still have a chance to allow the worlds greatest investor to invest for you, at essentially no cost, you wouldn’t take that option? Every decade some yahoo says its over for Buffett, and he proves them wrong. For myself, I allow him to invest for me for the majority of my portfolio and then attempt to invest with my own ideas with the remaining 20%. So far he does better than me! But, I am doing OK with my share, and most importantly learning to be a more Buffett like investor. Next up, writing calls, once the market settles down. But, with only a very small sliver of my portfolio as I learn whether I am as good at that strategy as my test run (no actual investments) indicates!

If I had a financial planner that told me to invest in mutual funds when I could have invested in Berkshire Hathaway anytime in the last 20 years, I would be asking him/her what they were thinking about. Talk about a low fee, well diversified investment that has a history of great returns and is currently very cheap!!!!!!! But, then again no one could make a living off of advising buying BRKB’s!!!

“So instead of a range of -100% to 450,000% (Berkshire Hathaway over 43 years), your range of possibilities are -80% to 7000% (S & P 500 Index over 43 years).”

Something looks wrong with these numbers. I understand your first range of numbers (although I usually annualize mine–yours annualized would be -100% to 21.61%). But the second range appears off. The SP500 has a historical variance of approximately +5.7 to 14.3% (annualized) when taking into account every 43 year period since 1871. Where did you get the -80% number from?

Your point still comes through either way–by diversifying you give up long term extreme upside for a better extreme downside.

If I was hoping for a return on the tail end of the upper extreme, I would want to know how likely it was for me to receive the extreme upside return (so I know what I was going to give up by investing the SP500). I would also want to know what returns are “most likely” to occur over the next 43 years–not just a comparison of the extremes.

There is another mathmatical law that plays into this. The law of large numbers, which simply says that any subset of a population will, over time, return to the mean. So, mutual funds that do above the mean will, over time return to the mean, no matter what the strategy employed.

Now here is the assumption that never made sense to me. I willingly give up the ability to create wealth (mutual funds average around 7-8% returns over the last several generations) in order to avoid a total loss of capital instead of a loss of most of my capital. However, if you are selling people on being passive investors, then you probably should be selling the least risky products out there. Unfortunatly for folks, it isn’t mutual funds. And now most employees are forced into 401K wrappers that really limit choices!

No, people should become active investors like you and I. I own three equities covering 2 asset classes. The majority of my portfolio is in Berkshire Hathaway, I own significant shares of a REIT (HCN), and I own a small amount (very small now!) in a small bank that is well run and profitable. That’s it. Beyond that I invest in real estate and real estate development. Concentrated investments, bought fairly cheaply, like Warren Buffett advises.

I can’t comment re funds (I don’t – and probably will not – invest in funds due to the overtrading / overdiversification / fees issues), but I do agree in general: I hold very few stocks at a time: perhaps only 1 or 2 … never more than 4 or 5 (and, I can’t even recall ever holding that many at once) in one market (e.g. USA).

This part interested me the most:

“1. Overdiversification – This is the single biggest mistake made in managing assets. Once you get beyond three or four funds, you might as well index the whole pool of your assets. If you have more that one bond fund and two or three equity funds you are not really doing much to increase your return expectations or diversification.”

The reason it interested me was that the author made it sound like overdiversifying was really bad…but then basically says overdiversification really just provides little additional benefit, i.e., increased returns or reduction in risk attributable to diversification. I really doubt that the “single biggest mistake” I could make in managing assets would be to add a couple of extra funds.

Any thoughts on this AJC? Also, do you have 2-3 equity asset classes that you use or that you would recommend?