Thursday, January 15, 2009

Nothing Is Average

The British TV show Human Footprint found that the average person smokes 77,000 cigarettes in their lifetime and breaks wind 15 times a day. Of course, we’ve also been told that the average family has 2.3 children. Quick poll: who here has 2.3 children, breaks wind 15 times a day, and expects to smoke 77,000 cigarettes before they’re done? The point is – none of us are average.

So I’m amazed when people put so much stock in averages. The stock market fell 34% in 2008 – not my stocks. Homes in the US fell 4% for the year ending with the third quarter, but not in California (-20.8%!) or Texas (+3.2%). And not your house, I’m betting. See statistics are a fine way to get a feel for what could happen on average, but pretty lousy in any one specific instance. So the broad markets were down 34%, but McDonald’s wasn’t (up about 12%).

Diversification is a great way to become average.
The point of diversifying is to come closer to average and thus avoid as much risk as possible. One company might crash, but the average of one hundred or one thousand won’t. Probably. One home might burn down, but 20 homes in 12 states won’t. Not at the same time, at least. On the other hand, 2008 was a bad year to be average…

And basically what you’re saying is you think you’re in the bottom half, so you’d be happy to get to average. Wouldn’t it be better to beat the average? Could you do that? Sure. All it takes is a little work. Do some research. Take some time to get to know your market. Get a feel for things in general, and specifically for what you’ll be investing in. Know the best neighborhoods in your town, and buy the worst house in those neighborhoods. Find stocks now that have dropped in price, but increased in fundamentals. Stay away from bonds right now – interest rates have no way to go but up!

Next week, I’ll be writing about Should You Invest? The answer shouldn’t surprise you, but it probably will anyway. Stay tuned.

So who’s going to smoke my 77,000 cigarettes?

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