Uncommon Sense Truth

Last year, I had a post discussing leverage. I want to tie that post in with another topic, diversification. I did not link the previous because I will recap and add more detail now. This argument goes for any asset class or investment. Leverage is not bad. If you have a margin account or borrow to invest those are not bad things. The problem is you are subject to a loan or margin call from the lender, which can be devastating when the underlying asset prices fall. However, the problem does not seem to be the leverage but the investments. For instance, a margin account that bought FCX at $18 as opposed to a margin account that bought the ABX at $100. I am fully aware that top quality and good investments go down but I can handle losing 25% versus getting wiped out. Now my other issue is diversification, the only free lunch in the market. While I do oppose it, should be emphasized as much as the media and pundits spotlight the topic. Most managers that I keep an eye do not own more than 30 positions. Again, I do not recommend retail investors own 3 positions and let it ride. The focus of the investor should be quality and risk management. I would rather own one stock and put the rest in cash than buy other stocks so I can feel diversified.