Advanced Automatic Investor

[aptus]

Hello Leap,

"If we were to go back in time let's say to 1964 when the Beatles landed at JFK on a PAN AM jet, what probability do you think the long term investor would have assigned to the now bankrupt PAN-AM?"

I'd say the assigned probability of PAN-AM not going bankrupt would have been fairly high, but not 100% (it's a similar situation to Lucent). But diversification (e.g. also investing in other major airlines) would have protected the majority of assets.

However if we go back to a more recent time, let's say to 1998, I think we could say that the probability of IBM going out of business in 2002 was MUCH lower than the probability of PeaPod.com going out of business in 2002.

To put it another way, if I had to bet my life savings and all my future earnings on just ONE company (i.e. invest everything I have in their shares now and invest all my additional earnings in them for the next 10 years, and then sell everything in exactly 10 years and 1 day), which company would I choose?

Would it be a GE or IBM or would it be a DCLK or CMGI?

Personally I'd choose one of the former two because I think they have a greater probability of being profitable (not to mention solvent) in 10 years.

That's why I think you can assign general probabilities to stocks if you perform the appropriate due diligence. On the other hand, this has to be combined with diversification in order to reap as much protection as possible.

I do agree with you that AIMing index funds (providing they're volatile enough) is a good way to go, for some investors, because they provide diversification and usually (depending on the index) some form of due diligence built right in.

Thanks for your thoughts, the discussion on this board has really picked up in the past two weeks. If we ever get to 1000 posts I'll have to take a page from Tom Veale's book and offer an Automatic Investor version of his Secret Decoder Ring (SDR).

Regards,
Mark

http://www.automaticinvestor.com