Diversification defiance: All your eggs in one basket?

February 8, 2011

Tom Hoebbel is pictured in this undated handout photo. REUTERS/HandoutTom Hoebbel is driving everybody around him crazy. And he’s kind of enjoying it.

For his unconventional investing style, the 46-year-old professional photographer from Ithaca, New York, has taken flack from his former financial adviser at Edward Jones, from his own brother — who’s a financial planner — and even from his brokerage site, TD Ameritrade, whose portfolio tools constantly remind him that his investments are way out of whack.

Hoebbel has one word for all the doubters: Apple. He bought it when the market was tanking near the end of 2008, and Apple was priced down in the 90s.

“Since then it’s gone up over 300 percent, and now it’s over half of my portfolio,” he says. “I’ve heard all the advice about diversification, and how I should have a balanced portfolio. But for me, returns are better than some generic formula.”

And lest you think he’s totally undiversified, Hoebbel also bought another little stock at the market bottom: Google.

That kind of brilliant market timing makes him look like Ithaca’s version of John Paulson. But for financial planners, investors like Hoebbel are enough to make them tear their hair out. Planners take pains to point out that a well-diversified portfolio – incorporating a broad mix of equities, paired with fixed-income investments and cash – boosts long-term returns while paring down volatility.

“Sure, Apple stock has been on a tear,” says Robert Schmansky, president of Clear Financial Advisors in Detroit. “But now (co-founder and chief executive) Steve Jobs has had to step away, and who knows what’s next? As an adviser, my job is to point out potential dangers. And investing in just a few stocks is similar to gambling, because there’s a possibility of total loss.”

Spreading your cash among multiple asset classes, of course, serves to anchor your portfolio during vicious market storms. A recent study by investment-management firm Vanguard, looking at returns dating back to October 2007, reveals that an all-stock portfolio would have sunk during that time by 11.55 percent. Meanwhile a portfolio split equally between stocks and bonds would have risen by 5.5 percent, and one with just 30 percent equities would have spiked by more than 12.3 percent.

But some investors simply enjoy buying shares in a single, well-run company. “I tend to think like Warren Buffett, who has said that diversification is for people who don’t know what they’re doing,” says Hoebbel. “Show me a company better than Apple, and I’ll buy it.”

Indeed, overweighting a single stock is more common than you might think, especially thanks to 401(k)s where company stock is offered as an investment option. In such plans, more than a quarter of participants nationwide have 30 percent or more of their portfolio in company stock, according to data from the Employee Benefits Research Institute.

That demonstrates admirable faith in employers, but it certainly ratchets up your investment risk. Schmansky finds that single-stock-loving investors fall into a few groups: Young folks who don’t know a lot about investing principles; those who enjoy the gambling-type thrill; and people who are so far behind in their investing goals, that they feel they need to bet big to catch up.

Then, of course, there are the investors who look in the rear-view mirror and want to replicate past successes. Says Schmansky: “They look at what Apple has done over the last few years, and they say, ‘Why wasn’t I in that?’ Or here in the Detroit area, they tend to say ‘Why didn’t I bet it all on Ford?’ They listen to all the speculators they see on TV, but they never think about the potential downsides.”

At the end of the day, though, it’s not Schmansky or any other financial planner who makes the final call. It’s the individual investor – and listening to Tom Hoebbel, it doesn’t sound like he’s switching strategies anytime soon. “So far I’m pretty happy with my decision-making,” he says. “At the market bottom, if I had left even 20 percent in bonds or money markets, I’d be kicking myself right now. It’s a waste of money. In fact, if I could go back in time, I’d take out a loan – and buy even more Apple.”

10 comments

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Posted by Tweets that mention Diversification defiance: All your eggs in one basket? | Analysis & Opinion | — Topsy.com | Report as abusive

Great article! I was practically laughed at by 3 different employees of 2 different brokerage houses as we discussed my portfolio which has always had at a minimum around 75% allocation to Apple.

Started out 6 years ago fully invested 100% in a large amount of shares and have done very well by continuing to hold a core position of shares and selling OTM puts when I think we are oversold and OTM calls when I believe we may be in for a pullback. In ’09 I was assigned additional shares when 10 of my OTM puts (Jan 100 strikes) I had sold in Sep of 08 were put to me.

I continue to believe that AAPL will dominate the consumer electronic space and that even without Steve Jobs AAPL’s revenue stream will increase year over year at an astonishing pace for many years. The iPad is in its infancy and is already overtaking Apples mac revenue stream. That is an amazing feat for a product that is less than a year old!

Posted by KaylaJohnson | Report as abusive

Sorry…I didn’t mean to imply that I am nearly as smart or savvy as Warren Buffett, just that I like his philosophy of buying a stock on its merits rather than what category it falls into on the diversometer.

Posted by TomHoebbel | Report as abusive

“I tend to think like Warren Buffett,”
who wouldn’t touch Apple with a ten foot pole, as he is looking for “sustainable, long term [more than 30-years] moats” in his business.

” “Show me a company better than Apple, and I’ll buy it.””
there are plenty better investments, with wider moats, for 50-years down the road.

““At the market bottom, if I had left even 20 percent in bonds or money markets, I’d be kicking myself right now. It’s a waste of money. In fact, if I could go back in time, I’d take out a loan – and buy even more Apple.”
anti-Graham talk.

this guy is basically an igoramous who happened to buy at the bottom. Many stocks have far more than tripled, if you had the right timing. Doesn’t make you smarter, just luckier.
cf, Ford, Teck Resources, Bank of America, Citi, etc.

Posted by Adam1234 | Report as abusive

As my grandmother used to say, “It is all fun and games until someone loses an eye.” And that is the same way with “investing” like this. It is all bright and light until the single (or two) stocks head south ….

Posted by WBGriffin | Report as abusive

The real question is, why does he have a financial advisor?

Posted by Greenspan2 | Report as abusive

Cheer him on. We have an endless need for greater fools.

Posted by ARJTurgot2 | Report as abusive

I went to Vegas in 2009 and put all my money down on red on the roulette wheel and won! I doubled my money! I went back to Vegas in 2010 and did the same thing — red won again! Doubled my money again! Obviously, the smartest thing for me to do is to go back to Vegas this year and do the same thing! I mean, I couldn’t lose it all, right? After all, I’m up 200%! I’m a genius, not a gambler…right?

Posted by Welred | Report as abusive

Tom,

You are likely better off following Steve Jobs’ and W. Buffets’ leads, rather than a couple of these wise guys. While my portfolio is diversified, I appreciate your position, and guts.

With what you probably have gained in the last 3-4 years with Apple and Google, if you lost half of that, you would be way ahead of many. Perhaps give diversification some thought, even Warren Buffet doesn’t own just 2 or 3 stocks, but follow your gut in decisions, not the pundits. One thing I learned from listening to Warren Buffet, and from experience, is to buy a company whose product or service you are reasonably familiar with and feel good about based on what you know; look cautiously at anything a broker/adviser throws at you.

Most of the selections we have made on our own turned out much better than most by a broker. The biggest exception was a recommendation to convert everything that was in a SEP/IRA into a bond market fund, (which would have reduced my then diversification) about two years before the crash. Didn’t do that, would have been in much better shape had I done it, but it is alright now.

Posted by ayesee | Report as abusive

Tom: and you are exactly right about the merits (and being familiar with those merits) of a company rather than its diversometer reading.

Posted by ayesee | Report as abusive

Reuters did not post my earlier comment, but I will summarize:
1)Warren Buffett would not touch Apple with a 10-foot pole.
2)His $60+billion portfolio includes a LOT of bonds, pref-shares, and other debt equity.
3)His teacher, Benjamin Graham strongly advocated a 50/50 bond/equity split at ALL TIMES, except for times of exceptional pricing in one or the other, in which case he still wanted minimum 25% in the less attractive category.

I’m glad you did so well with your investing, but I just want to point out the truth that had you bought any half decent company at the market bottom, it would have tripled or better – in fact, the worse they were, the more they went up:
TCK, BAC, C, DTG, anywhere from 5 to 50 times. So some good fortune and excellent timing was involved, to, not necessarily successful individual equity analysis.

Posted by Adam1234 | Report as abusive