Just what linkage is there between Carlos Slim Helu being selected as the richest man on earth by Forbes, and the outlook for his native Mexico? In my view, nada.
To be sure Matthew Miller, the senior editor of the magazine who does the billionaire tables thinks otherwise. But he would, wouldn’t he?
Back in the Dark Ages when I started Global Investing we recommended TelMex, Slim’s flagship company, until one day via a financial analyst publication I received a devastating report from a CFA about how TMX accounted for clients and churn.
The author had been blocked from putting out his views by the investment bank he worked for. They had a relationship with Slim’s company (who didn’t?) Mr. Slim was a friend of the then-president of Mexico and had benefitted mightily from special deals on telephone and TV licenses.
My source passed his analysis on condition of anonymity. And we dropped TMX from the Model Portfolio. And the whole world of Mexico analysts tried to find out who had done the deed. My lips were sealed.
For whatever it worth, as Mr. Slim won the gold ring by beating Bill Gates by the mere bagatelle of $500 mn in wealth, Mexico is seeking $48 bn in rollover credits from the International Monetary Fund. Same order of size.
A reader of the pre-subscription newsletter named Kim K. wrote to me yesterday, I think from Canada:
I think that the reader who was talking about playing roulette was right. You have about 60-70 stocks in your portfolios. An average investor cannot hold that many stocks, he has to pick maximum of 20-25. So there is a lot of luck involved to pick the “good” ones.
It is a well know [sic] fact that with 20-25 stocks, the total risk of the portfolio is reduced by 70 percent. Further increase in the number of stocks does not produce any significant further risk reduction.
The most successful newsletter in the last 5 years, [Cabot] China & Emerging Markets (average annualized return of 21.4% in the last 5 years, including the 23% loss in 2008) holds up to 10 stocks.
Even with only 10 stocks you can do very well including only 23% loss in 2008. Holding 60-70 stocks is impractical for most individual investors. Once you need to pick and choose, it’s no more than roulette. We both know that 80% of your performance is contributed by 20% of the stocks (20/80 principle works here, like in other areas in life). If I have a portfolio of 20-25 stocks and I want to allocate 40-50% to global stocks, I can pick and choose only 10-12 of your stocks. What are the chances that I would pick those 20% big winners? No more than pure gambling.
Vivian replied:
I think you are misrepresenting the pile. There are in fact 4 portfolios one for beginners made up of closed end and exchange traded funds for instant diversification; then a yield portfolio for the over 40s who need stability and which people add more of as they get older and older; then buy and hold which is the basic portfolio; and then speculations which are just that.
They have different risk so they also produce different gains. In fact last year the buy and hold outperformed the speculative which is odd but we were in a major market recovery.
As for my ability to tell you which 10 or 20 stocks will produce the bang-up winners, sorry, but my crystal ball is clouded. We never add a new share without selling something to make room. I never say “EVERYONE BUY THIS STOCK NOW!”
If you want a momentum-driven newsletter, buy it. I am not buying China and Emerging Markets without the rest of the globe. You compare our Hulbert performance with the CEM one. Okay, go to China and emerging markets and invest all your money there and good luck to you.
Diversification does not mean buying 10 stocks in China and emerging markets while ignoring the rest of the world outside the USA. The Chinese growth story has been wonderful and we benefitted from it handsomely, but I would not put all my money, or half my money, or even 10% of my money into Chinese shares. Nor should you. Nor even would Fei Chen who writes about China for us.
Nor having watched the Chinese Great Internet Wall in action would I ever buy Baidu, one of the top Cabot performers just on ethical grounds. Running a newsletter makes me part of the press, and when in China I do not want my access to the world cut by the authorities as it was during my 3 weeks in China two years ago.
China and emerging markets alone make up a concentrated high-risk approach to global investing. And past performance is not predictive of future results, as the SEC keeps making funds tell people.
So if you were to ask my advice, which you didn’t, I would say that you should balance those ten emerging markets plays with probably another 30 positions in developed country and yield stocks.
I have been editing global investing for 20 years and if I had been doing a single best idea each issue I would no longer be in business. And I and my readers would be much poorer.
Another reader commented on my rule that we sell to buy something else that it was just like his tie collection. He gets rid of an old tie before he will wear a new one. More for paid subscribers from Canada and Britain and China below starting with China.
