(snip)"Blending Zen with Wall Street, Town's anyone-can-do-this advice, in his best-seller "Rule #1," amounts to: Don't lose money, find great companies, know their worth and acquire them at 50 percent off. Beyond that, he says the traditional advice -- invest in mutual funds, diversify, buy and hold -- is strictly for losers.
Let's cut to the chase: What's wrong with mutual funds?
First, if you intend to stay ignorant about investing, if you don't intend to get the education to tell a good business from a not-very-good business, you're going to have to give your money to somebody and let them invest it. In that case, the bad choice of the choices is mutual funds. They're going to take nearly a percentage point a year and they're not going to deliver anything that an index fund doesn't deliver. So just go and get an index stock fund. Buy SPDRs or Diamonds (Dow Jones ETFs) or the Nasdaq and be done with it. Then you won't have all these management fees and you're going to (earn) the index for sure, which is the best you can do in a mutual fund over any 20-year period of time anyway. So you might as well do an index.
You're also a doubting Thomas when it comes to a balanced portfolio, right?
We're going to separate the world into two groups of people: those who are ignorant and are going to remain so about investing -- and they have to do mutual funds, what other choice do they have? -- and those who are going to learn what the best investors in the world have known for 100 years, which is just the basic fundamentals of what a great company looks like and what it's worth. When you know that it's a great company and you know what it's worth, then you'll know if it's on sale. You buy it on sale and you're off and running.
When you can buy Johnson & Johnson on sale, buy it. You're done. You don't need a mutual fund when you can buy Johnson & Johnson on sale; it's been around 120 years, it's going to be around another 120 years. That's not hard. That's all I want to tell people -- it's not hard. You don't need to buy lots of things, you can buy just one good stock and you'll be in good shape.
Surely you're not advocating that people put all their money in one stock? It may have worked for you, but are you saying this is a smart investment strategy?
For getting started, the key thing is to find one good one. Then, as you get better and better at it, you can pull more and more money out of mutual funds and maybe end up with four or five really good companies you like in four or five different areas of the market.
What about the argument for diversification? Shouldn't investors protect themselves from market volatility by diversifying among a few dozen companies?
One of my favorite Warren Buffett quotes is, "Diversification is a protection against ignorance." It's not meant to be mean, but if you don't know the difference between a wonderful business that is on sale and a bad business that isn't, you must diversify. That's your only logical choice. If you can't tell the difference between things, then you have to spread your money out across a lot of things. But when you can tell the difference, then diversification hurts your portfolio performance."(snip)



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