Thursday, June 07, 2007

Russian Roulette

Nick Murray is a well known figure inside the investment advisor community. He could be called an advisor's advisor. A prolific writer with a dry style and laser sharp insight his monthly columns in Financial Advisor magazine are greatly anticipated.

This past month Nick chose to discuss concentrated stock positions. He weaves an interesting story about one of the bluest of blue chips, Merk. Noting that over the years Merk has been an excellent investment creating great wealth for shareholders. But then on September 30, 2004 Merk announced that it was withdrawing the blockbuster drug Vioxx from the market. You can remember the story from there. Fear of class action lawsuits and memories of how asbestos decimated the building industry in the 1980s and how silicone implants crippled Dow Corning came flooding to the public consciousness.

Merk opened down 27% the next day and eventually bottomed about 70% off its highs. Nick then coins one of the phrases he is famous for: "You can get rich by under diversifying. But you cannot stay rich by under diversifying."

Wow! what a great way to sum up in a nutshell a lesson that could have saved millions of dollars for the employees of Enron, Cisco, Sears, Xerox, and a host of past Wall Street darlings that eventually fell on hard times. In fact, Nick likens overly concentrated stock holdings to playing Russian roulette with your financial future. You may be okay today, "but tomorrow may be the day when the sun comes up on your Vioxx."

Nick's advise? "Sell every share you have to until that stock is no more than 20% of your net worth...and do it by nightfall."

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