Bigger Is the Enemy of Better Investing
The more you bet on a series of favorable gambles, the higher your expected gain on each event. But if you bet too much, your most likely outcome is to lose money.
There’s a basic investing principle that many ignore.
Photographer: Bloomberg
Elon Musk has had a remarkable 12 months. His net worth sextupled, largely on account of his stake in Tesla Inc., which increased 740% in 2020. Musk isn’t the only one rejoicing. Those with concentrated holdings in various technology companies and cryptocurrencies have likewise enjoyed once-in-a-generation returns. They should be celebrated for their achievements, but their outsized positions and gains are potentially sending the wrong message to ordinary investors.
Twitter and Reddit are replete with examples of individual investors who have become multimillionaires through concentrated investments that have increased a hundred-fold in a relatively short period of time. And many of them are proud to say they’re keeping the faith and not reducing their exposure in the expectation of further massive gains.