Hi, my name is Tim Clarkson, and this is the third podcast. I really enjoy doing these podcasts. I woke up at four o'clock in the morning a week ago and wrote this and just had a lot of fun with it. And I hope people listening to these podcasts are having fun. These are ideas that I've developed over the last 40 years, and I'm excited to share them with the public. So, the third key idea is diversification. Diversification is the third key to being successful in the stock market. Like a good gardener, a good investor needs sun, water, soil, and good seed. In investing, hanging on to your winners is the sun. Buying undervalued stocks is the water. Diversification is the soil. In my first podcast, I talked about hanging on to your winners or the sun in my gardening analogy. In the second podcast, I shared the importance of buying undervalued stocks, our water, as a proven way to success. In the next podcast, we will talk about what a high quality, that is the good seed is. And spoiler alert, it's not what you might think.
Developing a diversification mindset
In this podcast, we will talk about diversification, our good soil and why it's so important to control both risk and create reward. A smaller portfolio under $100,000 needs about 7 to 10 different stocks with about the same amount of money in each stock. At Van Clemens, the stockbroker who has lived diversification is Dennis Felix. Dennis has often owned 200 stocks or more. My current favorite stock and the firm's largest holding, Innodata, was Dennis's idea. How has Dennis done over the years? Well, glad you asked. Dennis created the wealth to buy, with cash, the beautiful home he owns on Lake Vermilion located about 85 miles north of Duluth. He had a dream to live up north, and his diversified portfolio made it happen. We often think that diversification lowers risk. And it does. If you own 10 stocks, maybe one or two of them are either losers or underperformers. Or maybe they're just still incubating. Knowing that our money is spread out gives us the courage to take the necessary risks we need to create real financial success. I like to think of diversification like Bingo cards. You'll need 7 to 10 stocks to get a Bingo. In the stock market, a Bingo is a stock that increases 5 to 10 times or even more. Your best performer is often your fifth-best idea, not the one you like the most. This is very humbling.
- 1:47 - Tim Clarkson gives credit to colleague Dennis Felix for this stock to buy and standing out as a stock diversification advocate
- 3:37 - Tim Clarkson fully defines portfolio diversification and mentions 2 of his current favorite stocks (including one based in Circle Pines, MN)
The stock market will teach you humility, something more valuable than money. Diversification also brings you to roads untraveled, insights that I wouldn't have got from reading a daily newspaper or on the internet. I visited Innodata three years ago and discovered the key secret to artificial intelligence, maybe the most exciting new frontier that will change our world. I will tell you about that secret next month in my lesson on quality. Diversification allows us to expand our horizons and learn about things we would otherwise know nothing about.
Large stocks or small stocks?
Albert Einstein said success comes from curiosity, concentration, perseverance, and self-criticism. A diversified stock account means that you own different types of stocks. Having seven different bank stocks is not diversified. You need some stocks that are cyclical, say fertilizer or automobile stocks. Or you need some stocks that are not cyclical, such as drug stocks or utilities. And you need some large stocks, say like Microsoft, or small stocks like my favorites, Innodata and Northern Technologies (headquartered in Circle Pines, MN). You will also need domestic stocks and foreign stocks. In the last 10 years until very recently, large stocks have dramatically outperformed small stocks. I would be out of business had I not diversified. Diversification fills both our financial and emotional needs. We need 7 to 10 stocks because we don't know which stock is going to be the winner. We also don't want to have all our money in a big loser. But diversification is also a lot of fun. The stocks often tell a story about the dynamic and rapidly changing world we live in. When I visit companies, I learn amazing and important information, almost like being in Star Trek at times. And on the other hand, Aristotle wrote about balance and moderation as the key to human success. Being diversified is about being balanced, moderate, and humble. Thanks.
The discussions contained in and referred to in this podcast are provided for educational information and entertainment purposes only. The information, statements, comments, views, and opinions expressed or provided are not necessarily those of Van Clemens and may not be current. Van Clemens does not make any representation or warranty as to the accuracy or completeness of any of the information statements, comments, views, or opinions contained in this podcast. Any liability, therefore, is expressly disclaimed. Van Clemens does not undertake any obligation whatever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views, or opinions set forth in this podcast. You should not make any decision, financial investment, trading or otherwise based on any of the information presented in this podcast without undertaking independent due diligence in consultation with a professional broker or financial advisory. You understand that you are using any and all information available on or through this podcast at your own risk.
Contact Van Clemens
You've been listening to Investing Beyond the Noise with Tim Clarkson, Vice President of investments at Van Clemens and company in Minneapolis. Visit vanclemens.com or call 612-758-9140.