We are hearing a lot these days in the business about what's called "single-stock risk," meaning what happens if you buy the wrong stock for your portfolio, as in one that gets clobbered for whatever reason.
I think on a day where we see some very strong individual stock performance in an overall tranquil session, it's worth it to address the notion of the danger of single-stock risk, which has become all the rage among many stock professionals.
First, if you think I scoff at single-stock risk, you would be wrong. It is why I endlessly say your first $10,000 worth of saving must be index funds. I want you diversified and I want you to capture the progress of American industry through a fund that mimics the S&P 500. I know many people don't have the time, the inclination or the analytical abilities to make decisions about individual stocks, and I don't want them to. They should not be denied the exposure to stocks because of those handicaps, so an index fund is a very good proxy.
At the same time, though, I don't want the hobbyist, the home-gamer or those fascinated with stocks to be frustrated about the desire to learn about the market with an eye toward making decisions themselves about individual stocks. I know there is luck involved in investing, and maybe you have the ill fortune to pick the wrong stocks. But who am I to tell you that you are too stupid, ill-informed or easily defeated by the big boys with the short-term trading edge to pick an actual stock or two or more for yourselves after you have put the requisite money into that index fund? I am not going to insult you with that nonsense. I listen to your calls and read your emails constantly and I often learn as much from you as you might from me. Knowledge is power in this business, and most of you seem to have it.
In fact, I want to go one step further. I think there is an element of single-stock risk that I really abhor, and that's the shame of missing out on the performance of an individual stock because you are buffaloed into thinking it is too dangerous or you are too ignorant to do homework and decide if you like the company enough to own a piece of it.
The proselytizers of single-stock doom sometimes make this whole business out to be too hard. Take this morning. I had the privilege to attend old friend and Yale School of Management professor Jeff Sonnenfeld's unbelievably enthralling chief executive leadership conference at the New York Stock Exchange, and while the contents of the confab are off the record, I couldn't help but look around the room and scoff at the notion of single-stock risk. Why?
Because in my line of sight a few feet away, I saw Steve Miller, a brilliant turnaround artist who is now on the Dow Chemical (DOW) board; Nick Pinchuk, CEO of Snap-on Tools (SNA); Tom Quinlan, CEO of R.R. Donnelley (RRD); Stuart Miller, CEO of homebuilding giant Lennar (LEN); and Ian Cook, CEO of Colgate (CL).
I can't say what they said (that's bound by the rules), but I can tell you what I said. I marveled that the love of index funds and sector funds is so great, as is the fear that the market is so totally rigged against the little guy that the public is missing out on owning a piece of the companies these CEOs lead.
The single-stock risk folks would have you believe that having a piece of Tom Quinlan's R.R. Donnelley is a big mistake, even as he is giving you a 5.34% yield and has already rung up a 15.89% increase in the stock price since the year began. Quinlan's working like a dog to consolidate the print industry so you can profit from it. At the same time, he is branching out to all new kinds of printing.
Now, for much of the second half of my father's life, he owned Colgate stock. Why? Because he said everyone in the world has to or will have to brush their teeth. He often, for some unknown reason, would chant the jingle, "Brush your teeth with Colgate, Colgate dental cream." So when I got to Goldman Sachs (GS) 32 years ago, I did the research and could see that Colgate was going from a domestic toothpaste company to a worldwide consumer-products powerhouse, and that was worth participating in. How risky was it to own the single stock of one of the great brands of all time as it traveled from a buck thirty to $67.90? Look, you could say that was hindsight, but for heaven's sake, it happened and you probably used one of its products during that magnificent run.
The depth of the Great Recession saw a huge decline in the homebuilding industry. Many homebuilders were annihilated. But not Lennar. What did CEO Stuart Miller do? How about take advantage of the homebuilding crash to pick up cheap land that will allow his company to shine for years and years.
When Dow Chemical welcomed Steve Miller, one of the great turnaround artists of all time, to the board of the company, I rejoiced. I owned it for my charitable trust, and before that had owned AIG (AIG) during a period where it prospered under his chairmanship. It was one of the many successful turnaround roles in his career. More single-stock risk? How about single-stock reward?
What can I say about Nick Pinchuk of Snap-On that I haven't in the many times he's been on Mad Money? How about that the stock was at $41 when he became CEO and it's now at $156 eight years later? How about that he has transformed the company into one of the great stealth technology tool enterprises we have in this country? All you had to do was watch and listen and you could have had that one.
There were tons of CEOs at this eye-opening conference. I am only talking about the ones within sight. To me, that says the opportunities are as hidden as Edgar Allan Poe's Purloined Letter. Oh, and I wish the promoters of these endless ETFs would own up that a tech ETF would have obscured the gains of Apple (AAPL) or a drug ETF could have kept you from owning Regeneron (REGN) -- again, two stocks that I've flogged and told you not to trade but to own pretty much for the duration. (AAPL and DOW are part of my Action Alerts PLUS portfolio.)
To me, when you see what I saw at Sonnenfeld's conference today, you have to wonder whether perhaps the biggest worry about single-stock risk is missing the single stock that could make your year.
