Even some of the most seasoned portfolio managers will admit that their "best ideas" are not always their best stock picks -- especially in markets like the one we're currently experiencing. Why is this the case? As Nick Gogerty of the designing better futures blog explains in a colorful post about monkeys, clowns and the "investment circus," there's a mathematical reason for this observation. It's the difference between means and medians. As a whole, the market performs in a certain way -- this is the "mean." However, a significant percentage of this market performance is driven by the "outliers" that differ significantly from the mean.
Felix Salmon of Reuters riffs on Gogerty's post, highlighting his stock return chart of the day to show the importance of including "spectacular winners" in your portfolio if you intend to out-perform the broader market. Most investors don't know in advance who their "spectacular winners" will be, so they're better off holding the entire market. For investors who can correctly anticipate their "spectacular winners," it makes little or no sense to hold a broadly diversified portfolio. Instead of diversification, they end up with what Charlie Munger of Berkshire Hathaway referred to as "de-worsification."
So what do you think: Are your best ideas also your best stock picks?
[Chart: Stock Return Chart of the Day via Felix Salmon]
