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Listener Question: Too Much Diversification?

By Chris Hill – Sep 21, 2018 at 12:00AM

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Are you better off with a ton of small bets or a few bigger ones? Two of our experts share their experiences.

No power? No problem. In today's episode of Market Foolery, host Chris Hill and Motley Fool contributor Matt Argersinger come to you from the powerless Fool HQ studio with a show that's all about listener questions. Is now the time to buy big Chinese companies like Alibaba (BABA 3.33%) and Baidu (BIDU 1.04%)? Or is there still a heck of a lot farther the Chinese stock market can fall from here? What would Square (SQ 3.97%) have to gain from chomping up eBay (EBAY 1.65%)? Is there any downside to a no-fee, super-diversified portfolio, like one you might build on Robinhood? Tune in for answers to these questions, some advice on setting up a winning portfolio, and much more.

A full transcript follows the video.

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This video was recorded on Sept. 19, 2018.

Chris Hill: It's Wednesday, September 19th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, Matt Argersinger. Also joining us in studio is producer Dan Boyd. Why is producer Dan Boyd on this side of the glass? Well, if you follow us on Twitter, you know that we have a massive power outage at Fool global headquarters today. Is that going to stop us from doing the show? 

Matt Argersinger: Absolutely not!

Hill: Absolutely not! Producer Dan Boyd is the man with the plan, brings the equipment in. So, we're good. We're good! We're ready to roll. We're going to dip into the Fool mailbag. We're going to talk payments. We're going to talk diversification. We might take your question, if you would just drop us an email, to [email protected]. What's stopping you? Drop us an email! We're lonely, for crying out loud! [email protected].

First question from PK Patel in Arlington Heights, Illinois. "Can you cover the dynamics of some of the big Chinese companies like Alibaba, Baidu,, etc. and why those stocks are down significantly, despite sales and earnings growth? Is this a buy opportunity, or do you see a further decline?" 

It's a great question, Matty. Look, we're getting toward the end of the year. As we get into November, December, people will start to do their look-backs on 2018 and say, "Well, what was the big investing story of the year? What was the big business story?" This isn't going to be No. 1, I think, on anyone's list, but it really should be a top five story in terms of investing. He's right.

Argersinger: Yes, I think so. If you think about it, we haven't experienced a "bear market" for U.S. stocks. 2011 was a tough year, but really, since the end of the financial crisis, the end of the last recession, so, nine years here. But that's not the case for China. If you look at the Shanghai and Shenzhen stock markets, the primary domestic stock markets in China, they're down more than 25%, at least as of yesterday. So, China has experienced a bear market. What's interesting is, these foreign-listed Chinese stocks -- the Baidus, the Alibabas, JD -- they've been wrapped into this downturn, which has been precipitated, I think, by the trade war that we have between the U.S. and China, the tariffs, the threat of more tariffs and what that's going to mean long-term. 

I think now, the narrative is, "Well, even if this trade spat smooths out, or it isn't as impactful as we think it could be today, there could be a slowing down of the Chinese economy." We've already seen some signs of that. 

So, what you're seeing, I think, is this institutional rotation out of Chinese stocks. Big institutions have just hit the sell button for many reasons. A lot of these companies, which PK rightly pointed out, are growing -- I mean, the market opportunities are vast. I have to say the stocks look very cheap. But they've been thrown out like every other Chinese stock in the world, certainly, over the last few months. 

Hill: Yeah, I almost feel like the answer to his question, "Is this buy opportunity, or do you see a further decline?" I almost feel like the answer to the question is yes. I'm not prepared to say "Oh, no, this is the bottom for them, they're going to bounce back." There's a really good chance we see further decline. It may still be a nice buying opportunity.

Argersinger: Right. I think, PK, if your time horizon is long enough -- and I hope, as a Fool, if you're a listener, we tend to think in years, obviously, not months or quarters -- this could be a really great time. I think what we've talked about before, the advent of the Chinese ADRs, what they're calling CDRs, which is going to enable companies like Baidu, the companies we talked about, like Alibaba, to list their shares in China as well for capital-raising purposes. That, I think, is a near-term catalyst that is still going to happen. Short-term and long-term reasons to think you could be getting a great value right now looking at these stocks.

Hill: Remind me, is there a firm date on that? Or is that like, we'll know it when it gets announced?

Argersinger: The Chinese regulatory authority that manages that has kept saying by the end of the year. But things are fluid, there's no set date for it. I think it'll happen sooner than later. 

Hill: It's like Amazon's second headquarters. "By the end of the year. We'll let you know." 

Question from Mike in Columbus, Ohio. "Should Square buy eBay?" That's a pithy question. That was the entirety of the email. "Should Square buy eBay?"

Argersinger: Yeah, Mike, that is a question we wouldn't have dreamed of asking just a couple of years ago. But if you look at where Square is today, relative to eBay, it's actually one of those hypothetical ones that actually could be reasonable. It's a reasonable question to ask. I don't think so, for a lot of reasons. Mainly because I think Square is trying to be as ubiquitous a platform as they can be. Buying eBay, even though they probably could do it -- and I know they already have a relationship with the eBay, in terms of lending that they've taken away from PayPal. eBay and Square have already partnered on loans to eBay sellers from Square.

But I just think Square wants to be the point of sale, point of transaction platform for many major markets. I think if they homed in on eBay, and spent a lot of their capital there, it probably limits their opportunities and their exposure beyond that. Then, you're going to get into competitive issues with other major e-tailers, not just in the U.S. but maybe around the world. I think they're going to hinge themselves to that. That eBay platform which we know isn't exactly the fastest-growing company. It doesn't have the same dynamics as it used to. 

Hill: It's not the fastest-growing, but it's also established enough and well-known enough that I think you're right, it would probably limit their opportunities elsewhere, as opposed to if Square bought Etsy, which is young enough and small enough, and I don't think that as many established e-tailers look at that as a competitive threat. Maybe, in some cases, that's to their detriment. But, it seems like, if Square wanted to go down this road, eBay would not be first on the list.

Argersinger: No, you're right. I like the mention of Etsy. That's one of the smaller bets that I think could make more sense and wouldn't hinder their opportunities down the road. 

Hill: Great question from Matthew Mandeville in Michigan. Matthew writes, "I've opened a Robinhood account with $5,000. With Robinhood having no transaction fees, is there any real downside to having a much more diversified portfolio with small positions in each stock, say, one to five shares, instead of fewer stocks but with larger positions? The only issues I can see are, one, it's much harder to closely follow each company; and two, with small positions, your big winners do not affect your portfolio as much. Even with these issues, it seems like having a more diversified portfolio would be better in the long run. What do you think?" Great question!

Argersinger: Very great question, Matthew! I will say, the answer is yes. I think there's a tremendous amount of value to having a portfolio where you're making small investments in companies on a regular basis. I'll share a quick personal story. I recently wrote an article for to this effect. I kind of have two portfolios. I have many portfolios, but two buckets that my personal stock net worth is invested in. 

One bucket is my concentrated portfolio that I pay a lot attention to. It never has more than 15 stocks in it. It has big positions. I "manage" it more regularly than I do this other bucket. The other bucket is essentially a collection of my wife and my retirement accounts. Those are 401(k)s that we have here at The Fool, for example, self-directed, and some IRAs. Essentially, we have regular money going in those accounts monthly. With those, I'd say they're almost on autopilot. Money goes in, we buy a few stocks, some of the money goes to an S&P 500 index fund. But mostly, it's just, every month, investing a few shares in few stocks. 

Recently, about a month ago, I went back, and I looked at how these two buckets had performed over the last roughly 13 years since I've been keeping track. The bucket of the concentrated big positions, it's done about 12% a year, which I'm not complaining about. It's pretty good. I'm proud of that. The autopilot bucket, where I'm just buying a few shares a month, that thing's done 18% a year. I attribute that to basically the mechanical idea of putting a small amount of cash to work every month in a few stocks. 

There are about 70 stocks across these retirement accounts. It's a big bucket, very diversified bucket. But what happens is, those small investments you make in some incredible winners -- like, I've got Netflix in there, for one, I've got MercadoLibre in there, I've got a few other monster companies that have done well. I've got a lot of losers in there, too. But, that bucket has just performed so well, and I pay so little attention to it. It is literally on autopilot. And this other one, where I'm spending a lot of my time, and making big stakes and doing big transactions? It's done a lot worse. 

Hill: That's great. Matthew's just starting out, but he's right, particularly if you're going to take a very even-handed approach and say, "Well, I'm going to buy $500 increments of 10 companies," or something like that. Or possibly even smaller than that. The longer you let that go, the more you're going to see that, yeah, you're going to have some losers, but you're going to have a couple of winners in there that will, in short order, they will no longer be small positions. 

Argersinger: No, no, no. And the beautiful thing about Robinhood is that, obviously, you're not paying transaction fees, which is a huge drag on returns. Matthew, you'll find opportunities down the road. You'll have bought a small position in a company, it's done really well. If you also do the David Gardner approach -- which is tend and water your flowers, trim your weeds down; maybe not selling, necessarily, but just focusing more capital on some of your winners in those portfolios over time, which I've also done -- you can do even better. 

I'm all about the small, regular incremental investments every month, even with a few shares. I'm all about it. 

Hill: One change in my investing that has happened recently is -- you just touched on this, it's the whole thing with your weeds. I was looking at my personal portfolio. Mine's with TD Ameritrade, it's been there for a long time. I'm sure others offer this service as well, where you're looking at your portfolio, and one way you can look at it is a pie chart. You've got your stocks, and you just click on this button, you can see, this is what percentage of your portfolio is tied up in this stock. I was looking at Under Armour. [laughs]

Argersinger: That slice has been shrinking.

Hill: It was like, "1% of your portfolio is in this." And I looked at that, and I just thought, "You know what? A couple of years ago, I would have looked at that and thought, I should just sell this and I should put the money elsewhere." That's where I just decided, no, I'm just going to let that go. It's not a significant part of my portfolio. I'm just going to let it go.

Argersinger: That's the beautiful thing. Under Armour, whether or not they end up turning around or not, it's a small position right now. If it drops another 50%, it's not doing much damage to your portfolio. On the other hand, if it turns around, maybe you can add to it again down the road, and all of a sudden, you have this bigger slice of your pie.

Hill: I could dare to dream that someday, it becomes 2% of my portfolio.

Argersinger: [laughs] One can dream.

Hill: Matt Argersinger, thanks for being here!

Argersinger: Thanks, Chris!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! Even if we don't have power, we'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, eBay, PayPal Holdings, Under Armour (A Shares), and Under Armour (C Shares). Matthew Argersinger owns shares of Amazon, Baidu, Etsy,, MercadoLibre, Netflix, Square, Twitter, and Under Armour (C Shares) and has the following options: long January 2020 $50 calls on, short January 2020 $50 puts on, and long January 2019 $15 calls on Twitter. The Motley Fool owns shares of and recommends Amazon, Baidu,, MercadoLibre, Netflix, PayPal Holdings, Square, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool recommends eBay and Etsy. The Motley Fool has a disclosure policy.

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