The intelligent and safe way to handle capital is to concentrate.

Diversification

The beginner in investing needs diversification until he learns the ropes.

Diversification is an admission of not knowing what to do and an effort to strike an average.



Concentration is the intelligent and safe way

The intelligent and safe way to handle capital is to concentrate.

If things are not clear, do nothing. 

When something comes up, follow it to the LIMIT.

If it is not worth following to the limit, it is not worth following at all.



How to start?

Always start with a large cash reserve.

Next, begin in one issue in a small way. 

If it does not develop, close out and get back to cash. 

But if it does do what is expected of it, expand your position in this one issue on a scale up. 

After, but not before, it has safely drawn away from your highest purchase price, then you might consider a second issue.




Greatest Safety:  Putting all your eggs in one basket and watching the basket

The greatest safety lies in putting all your eggs in one basket and watching the basket.

You simply cannot afford to be careless or wrong. 

Hence, you act with much more deliberation.

Of course, no thinking person will buy more of something than the market will take if he wants to sell, and here again, the practical test will force one into the listed leaders where one belongs. 

The less active a stock and the further distant the market, the more potential profit I need to see in it to make it worth buying.

It is purely a personal matter whether an investor feels that efforts at safety are more important than trying to get the maximum out of investing.



Stocks in the same business cycle

Diversification between the position of varying companies in their business cycle or as between their shares in their market price cycle is a very important consideration. 

Dividing one's funds between three or four different stocks which happen all to be in the same sector of their cycle can often be discouraging or dangerous.

After all, the final determinant of investment success or failure is market price.

• For example, industries which are in the final stages of a boom with rapidly increasing earnings, dividends and possibly split-ups, often offer shares high in price but apparently rapidly going higher.  There is a sound justification for an investor who knows what he is doing to buy into such a situation, especially for short-term gains, but it would be quite dangerous for him to put all of his funds in three or four such stocks.

• On the other hand, we naturally all seek deflated and cheap bargains, but very often shares like this will lie on the bottom much longer than we anticipate and if every share we own is in this same category, we may do very badly in a relatively good market.

Conclusions:

The greatest safety for the capable, lies in putting all one's eggs in one basket and watching the basket.  

The beginner and those who simply find their investment efforts unsuccessful must resort to orthodox diversification.

Greatest Care must be taken in Buying Convertible Bonds

Some common popular bonds in the market in recent years are the

• convertible issues and 
• bonds with warrants to buy stock attached.

Convertibles are popular because they seem under certain conditions to combine 

• a degree of bond dollar safety 
• with a chance of profit.

Profits can be made by careful selection, pricing and timing of these bonds.

Market price of convertible bonds

The market price of a convertible bond is a 

• combination of estimated true current investment value
• plus a premium for the current value of conversion privilege, if any.  

This premium varies with 

• the estimated opportunity to make a profit, 
• the length of time the privilege runs and 
• other factors.

The greatest care must be taken in buying convertibles.

The most common mistake is to look too closely into 

• the size of the premium or 
• the closeness of the conversion price on the bond to the current market for the stock into which it can be converted.

You should look first into the stock for which it can be exchanged.

• If you care to make a profit, this must go up.  
• You must start by being fundamentally bullish on the equity.  
• Only then can you look into the mathematical factors governing the price of the convertible bond.

An Ever-Liquid Account (Concept)

An Ever-Liquid Account

In its operation, an ever-liquid account is normally kept fully un-invested; i.e., in cash or equivalent only. "Equivalent" means any kind of really liquid short-term security or commercial paper.

Book values and market values are always kept identical.

Income is real income; i.e., interest, dividends, capital gains realized and realizable, less capital losses taken or unrealized in the account, which is always marked to market.




Cash and Equivalent (Beginning of period)

add Income:  
interest
dividends
capital gains realized
capital gains realizable

less losses:
capital losses taken
capital losses unrealized in the account


Cash and Equivalent (End of period)




How to keep the account truly ever-liquid?

Income and appreciation are obtained in the ever-liquid account by entering the stock market as a buyer when a situation and trend seem clearly enough established so that a paper profit is present immediately after making the purchase.

In order to keep the account truly ever-liquid, one must use a mental or an actual stop on all commitments amounting to some predetermined percentage of the amount invested (e.g. 3% stop loss or 10% stop loss).

One does not make a purchase unless one feels rather sure that the trend is sufficiently well established to minimize the possibility of being stopped out.  Yet it will happen occasionally anyway.

The decision of what and when to buy is made on a personal basis using various yardsticks best understood by individual investors.




Concentrated purchases of single issues

This investment philosophy leads into concentrated purchases of single issues rather than diversification, because one of the primary elements in the situation is that one must know and be convinced of the rightness of what one is doing.  

Diversification as to issue and type of investment is only hedging - a method of averaging errors or covering up lack of judgement.




Profiting from trends and pyramiding

This ever-liquid method also rarely calls for attempts to buy at the bottom, as bottoms and tops are actually impossible to judge ordinarily, while trends after they are established and under way can be profitably recognized. 

It is a method that leans towards pyramiding; i.e., towards following up gains and retreating before losses.  Such an account, properly handled, bends but never breaks. 

"Averaging down" is, of course, completely against this theory.

With mistakes, there is no cheaper insurance than accepting a loss quickly

Nevertheless, in investing, mistakes will be made.

And when they are, there is no cheaper insurance than accepting a loss quickly.  

That is the tactic of retreat than capitulation.



Serial losers

It would be very difficult for an investor losing, say, 5% to 10% each time on a succession of ventures, to continue to lose time and time again without checking his errors or stopping altogether.



Long term hold irregardless

A buyer who holds regardless of unfavourable news or action can become involuntarily locked in his "investment" for years and often, no amount of future waiting can extract him from his predicament.

It is important to regard the situation with an open mind, unbiased by a bad stale position, and it is important to be able to act each time convictions are very strong.

Unless losses are cut, such an attitude and such action are impossible.

Psychology and Investing: Herding

Stock Ideas

There are thousands and thousands of stocks out there.  Investors cannot know them all.

In fact, it is a major endeavor to really know even a few of them.

But people are bombarded with stock ideas from brokers, television, magazines, Web sites, and other places.





Herding Behaviour

Inevitably, some decide that the latest idea they have heard is better idea than a stock they own (preferably one that is up, at lead), and they make a trade.

In many cases the stock has come to the public's attention

• because of its strong previous performance, 
• not because of an improvement in the underlying business.

Following a stock tip, under the assumption that others have more information, is a form of herding behaviour.





Temporary Comfort from investing with the Crowd or a Market Guru

This is not to say that investors should necessarily hold whatever investments they currently own.

Some stocks should be sold, whether because

• the underlying businesses have declined or 
• their stock prices simply exceed their intrinsic value.

But it is clear that many individual (and institutional) investors hurt themselves by making too many buy and sell decisions for too many fallacious reasons.  

We can all be much better investors when we learn to select stocks carefully and for the right reasons, and then actively block out the noise.

Any temporary comfort derived from investing with the crowd or following a market guru can lead to fading performance or inappropriate investments for your particular goals.

Psychology and Investing: Mental Accounting and Framing Effect

Most of us separate our money into buckets - this money is for the kids' college education, this money is for our retirement, this money is for the house.   Heaven forbid that we spend the house money on a vacation.

Investors derive some benefits from this behaviour.

• Earmarking money for retirement may prevent us from spending it frivolously.

Mental accounting becomes a problem, though, when we categorize our funds without looking at the big picture.

• While we might diligently place any extra money left over from our regular income into savings, we often view tax refunds as "found money" to be spent more frivolously.  
• Since tax refunds are in fact our earned income, they should not be considered this way.
• For gamblers, this effect can be referred to as "house money."

We are much more likely to take risks with house money than with our own.

• There is a perception that the money isn't really ours and wasn't earned, so it is okay to take more risks with it.  
• This is risk we would be unlikely to take if we would spent time working for that money ourselves.

In investing, just remember that money is money, no matter whether the funds in a brokerage account are derived from hard-earned savings, an inheritance or realized capital gains.




Framing Effect

This is one other form of mental accounting.

The framing effect addresses how a reference point, oftentimes a meaningless benchmark, can affect decision.





Overcoming Mental Accounting.

The best way to avoid the negative aspects of mental accounting is to concentrate on the total return of your investments.

Take care not to think of your "budget buckets" so discretely that you fail to see how some seemingly small decisions can make a big impact.

Psychology and Investing: Confirmation Bias and Hindsight Bias

Confirmation Bias

How do we look at information?

Too often we extrapolate our own beliefs without realizing it and engage in confirmation bias, or treating information that supports what we already believe, or want to believe, more favourably.

If we have purchased a certain stock in a certain sector, we may overemphasize positive information about the sector and discount whatever negative news we hear about how these stocks are expected to perform.


Hindsight Bias

This is the tendency to re-evaluate our past behavior surrounding an event or decision knowing the actual outcome.

Our judgment of a previous decision becomes biased to accommodate the new information. 

For example, knowing the outcome of a stock's performance, we may adjust our reasoning for purchasing it in the first place. 

This type of "knowledge updating" can keep us from viewing past decisions as objectively as we should.

Psychology and Investing: Anchoring

When estimating the unknown, we cleave to what we know.

Investors often fall prey to anchoring.

They get anchored on their own estimates of a company's earnings, or on last year's earnings.

For investors, anchoring behaviour manifests itself in placing undue emphasis on recent performance since this may be what instigated the investment decision in the first place.

When an investment is lagging, we may hold on to it because we cling to the price we paid for it, or its strong performance just before its decline, in an effort to "break even" or get back to what we paid for it.

We may cling to sub-par companies for years, rather than dumping them and getting on with our investment life.

It is costly to hold on to losers, though, and we may miss out on putting those invested funds to better use.



Overcoming Anchoring

It may be helpful to ask yourself the following questions about your stocks:

Would I buy this investment again?

And if not, why do I continue to own it?

Truthfully answering these questions can help you severe the anchors that may be a drag on your rational decision making.

Psychology and Investing: Sunk Costs

Sunk cost fallacy is another factor driving loss aversion.

This theory states that we are unable to ignore the "sunk costs" of a decision, even when those costs are unlikely to be recovered.

Our inability to ignore the sunk costs of poor investments causes us to fail to evaluate the situation on its own merits.

Sunk costs may also prompt us to hold on to a stock even as the underlying business falters, rather than cutting our losses.    

[?Had the dropping stock been a gift, perhaps we wouldn't hang on quite so long.]

Psychology and Investing: Loss Aversion

Loss Aversion

Many investors will focus obsessively on one investment that is losing money, even if the rest of their portfolio is in the black.  This behaviour is called loss aversion.

Investors have been shown to be more likely to sell winning stocks in an effort to "take some profits," while at the same time not wanting to accept defeat in the case of the losers.

"More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other since reason." (Philip Fisher, Common Stocks and Uncommon Profits).

Regret also comes into play with loss aversion.

This may lead us to be unable to distinguish between a bad decision and a bad outcome.

"We regret a bad outcome, such as a stretch of weak performance from a given stock, even if we chose the investment for all the right reasons.  In this case, regret can lead us to make a bad sell decision, such as selling a solid company at a bottom instead of buying more."

We tend to feel the pain of a loss more strongly than we do the pleasure of a gain. 

It is this unwillingness to accept the pain EARLY that might cause us to "ride losers too long" in the vain hope that they'll turn around and won't make us face the consequences of our decisions.

Psychology and Investing: Self-handicapping

Self-handicapping bias occurs when we try t o explain any possible future poor performance with a reason that may or may not be true.

This behaviour could be considered the opposite of overconfidence.

As investors, we may also succumb to self handicapping, perhaps by admitting that we didn't spend as much time researching a stock as we normally had done in the past, just in case the investment doesn't turn out quite as well as expected.

Both overconfidence and self-handicapping behaviours are common among investors, but they aren't the only negative tendencies that can impact our overall investing success.

Psychology and Investing: Selective Memory, Cognitive dissonance and Representativeness

Selective Memory

Few of us want to remember a painful event or experience in the past, particularly one that was of our own doing.

In terms of investments we certainly don't want to remember those stock calls that we missed (had I only bought eBay in 1998), much less those that proved to be mistakes which ended in losses.

Such memories threaten our self-image.



Cognitive dissonance

How can we be such good investors if we made those mistakes in the past?

Instead of remembering the past accurately, in fact, we will remember it selectively so that it suits our needs and preserves our self-image.

Incorporating information in this way is a form of correcting for cognitive dissonance, as well-known theory in psychology.

Cognitive dissonance posits that we are uncomfortable holding two seemingly disparate ideas, opinions, beliefs, attitudes, or in this case, behaviours, at once, and our psyche will somehow need to correct for this.

"Perhaps it really wasn't such a bad decision selling that stock?"

"Perhaps, we didn't lose as much money as we thought?"

Over time, our memory of the event will likely not be accurate but will be well integrated into a whole picture of how we need to see ourselves.



Representativeness

Another type of selective memory is representativeness, which is a mental shortcut that causes us to give too much weight to recent evidence - such as short-term performance numbers - and too little weight to the evidence from the more distant past.  As a result, we will give too little weight to the real odds of an event happening.

Psychology and Investing: Overconfidence

Overconfidence refers to our boundless ability as human beings to think that we are smarter or more capable than we really are.

Such optimism isn't always bad.  Certainly we would have a difficult time dealing with life's many setbacks if we were die-hard pessimists.

However, overconfidence hurts us as investors when we believe that we are better able to spot the next Microsoft than another investor is.  Odds are, we are not.

Studies show that overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade.  Trading rapidly costs plenty and rarely rewards the effort.  Trading costs in the form of commissions, taxes, and losses on the bid-ask spread have been shown to be a serious damper on annualized returns.  These frictional costs will always drag returns down.

One of the things that drive rapid trading, in addition to overconfidence in our abilities, is the illusion of control.  Greater participation in our investments can make us feel more in control of our finances, but there is a degree to which too much involvement can be detrimental, as studies of rapid trading have demonstrated.

What Matters and What Doesn't

It is very easy for new stock investors to get started on the wrong track by focusing only on

• the mechanics of trading or 
• the overall direction of the market.

To get yourself in the proper mind-set, tune out the noise and focus on studying individual businesses and their ability to create future profits.

Begin to build the skills you will need to become a successful buyer of businesses.



1.  Investing does not equal trading

Investing is like a chess game, where thought, patience, and the ability to peer into the future are rewarded.

Making the right moves is much more important than moving quickly.



2.  Investing means owning businesses

If you are buying businesses, it makes sense to think like a business owner. 

This means

• learning how to read financial statements, 
• considering how companies actually make money, 
• spotting trends, and 
• figuring out which businesses have the best competitive positions.  

It also means coming up with appropriate prices to pay for the businesses you want to buy. 

Notice that none of this requires lightning-fast reflexes.

You should also buy stocks like you would any other large purchase:  with lots of research, care and the intention to hold as long as it makes sense.

Investing is an intellectual exercise, but one that can have a large payoff.



3.   You buy stocks, not the market

One thing to remember when listening to market premonitions is that stock investing is about buying individual stocks, not the market as a whole.

If you pick the right stocks, you can make money no matter what the broader market does.

Another reason to heavily discount what the prognosticators say is that correctly predicting market movements is nearly impossible.

• No one has done it consistently and accurately.  
• There are just too ma y moving parts, and too many unknowns.

By limiting the field to individual businesses of interest, you can focus on what you can actually own while dramatically cutting down on the unknowns.  

You can save a lot of energy by simply tuning out market predictions.

With so many predictions about the stock market floating around, simple statistics says there are bound to be a handful of them that come true.  When thinking about this, it is helpful to remember the saying: "A broken clock is correct twice a day."

Stocks are volatile.  Why is that?  Does the value of any given business really change up to 50% year-to-year?   "Mr. Market" tends to be a bit of an extremist in the short term, overreacting to both good and bad news.



4.  Competitive Positioning is most important

Future profits drive stock prices over the long term, so it makes sense to focus on how a business is going to generate those future earnings.

Competitive positioning or the ability of a business to keep competitors at bay, is the most important determinant factor of future profits.

Competitive positioning is

• more important than the economic outlook,
• more important than the near-term flows of news that jostles stock prices and 
• even more important than management quality at a company.

Time is a precious resource in investing.

Business economics trump management skill.

A company with the best competitive positioning is going to create the most value for its shareholders.




Summary:


Active traders have three things working against them:  the bid/ask spread, commissions and taxes.

Stocks are not just pieces of paper to be traded; they are pieces of businesses.

The stock market as a whole is nearly impossible to predict, but predicting the outcome of individual businesses is a more manageable exercise.

Mr. Market is highly temperamental, over-reacting to both good and bad news.

Future profits drive stock prices over the long term, and the competitive positioning of a business is the most important factor in its ability to generate future earnings.

My Golden Rule of Investing

My Golden Rule of Investing: 
Companies that grow revenues and earnings will see share prices grow over time.

• Over the long term, when companies perform well, their shares will do so too.  
• When a company's business suffers, the stock will also suffer.

For examples:

Starbucks has had phenomenal success at turning coffee - a simple product that used to be practically given away - into a premium product that people are willing to pay up for.  Starbucks has enjoyed handsome growth in number of stores, profits and share price.  Starbucks also has a respectable return on capital of near 11% today.

Meanwhile, Sears has languished.  It has had a difficult time competing with discount stores and strip malls, and it has not enjoyed any meaningful profit growth in years.  Plus, its return on capital rarely tops 5%.  As a result, it stock has bounced around without really going anywhere in decades.




Over the long term

Over the long term, when a company does well, your interest in that company will also do well.

Stocks are ownership interests in companies.  Being a stockholder is being a partial owner of a company.

Over the long term, a company's business performance and its share price will converge.

The market rewards companies that earn high returns on capital over a long period.

Companies that earn low returns may get an occasional bounce in the short term, but their long-term performance will be just as miserable as their returns on capital.

The wealth a company creates - as measured by returns on capital - will find its way to shareholders over the long term in the form of dividends or stock appreciation.

The market frequently forgets the important relationship between Return on Capital and Return on Stock

Return on Capital

Return on capital is a measure of a company's profitability.

                Return on Capital = Profit / Invested Capital


Return on Stock

Return on stock represents a combination of dividends and increases in the stock price (capital gains).

                Stockholder Total Return = Capital Gains + Dividends




The important relationship between Return on Capital and Return on Stock

The market frequently forgets the important relationship between return on capital and return on stock.

A company can earn a high return on capital, but the shareholders could still suffer if the market price of the stock decreases over the same period.

Similarly, a terrible company with a low return on capital may see its stock price increase

• if the firm performed less terribly than the market had expected, or,  
• maybe the company is currently losing lots of money, but investors have bid up its stock in anticipation of future profits.

Short run

In the short term, there can be a disconnect between

• how a company performs and 
• how its stock performs.

This is because a stock's market price is a function of the market's perception of the value of the future profits a company can create.

Sometimes this perception is spot on; sometimes it is way off the mark.



Long run

But over a longer period of time, the market tends to get it right, and the performance of a company's stock will mirror the performance of the underlying business.




The Voting and Weighing Machines

The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine - tallying which firms are popular and unpopular.  But in the long run, the market is like a weighing machine - assessing the substance of a company.




Message

What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.

Why Stocks Perform the Best

Why, exactly, have stocks been the best-performing asset class?

Why should we expect those types of returns to continue?

Why should we expect history to repeat?



Answers

Quite simply, stocks allow investors to own companies that have the ability to create enormous economic value.

Stock investors have full exposure to this upside.

Because of the risk, stock investors also require the largest return compared with other types of investors before they will give their money to companies to grow their businesses.

More often than not, companies are able to generate enough value to cover this return demanded by their owners.

Bond investors do  not reap the benefit of economic expansion to nearly as large a degree. 

When you buy a bond, the interest rate on the original investment will never increase. 




Microsoft in 1985:  Buy its bonds or its stocks?

For instance, in 1985,

• would you have rather lent Microsoft money at a 6% interest rate, or 
• would you have rather been an owner, seeing the value of your investment grow several-hundred fold?

Your theoretical loan to Microsoft yielding 6% would have never yielded more than 6%, no matter how well the company did.

Being an owner certainly exposes you to greater risk and volatility, but the sky is also the limit on the potential return.

It is important to have a long-term investment horizon when getting started in stocks.

Time is on Your Side

Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be.

With time,

• your chances of making money increases, and 
• the volatility of your returns decreases.

The Longer you invest, the Lower the Volatility of your Returns

The average annual return for the S&P 500 stock index for a single year has ranged from -39% to +61%, while averaging 13.2%.

After holding stocks for 5 years, average annualised returns have ranged from -4% to +30%, while averaging 11.9%.

If your holding period is 20 years, you never lost money, with 20-year returns ranging from +6.4% to +15%, with the average being 9.5%.


These returns easily surpass those you can get from any of the other major types of investments.




The Importance of having a Long-term Investment Horizon in Stocks

Again, as your holding period increases,

• the expected return variation decreases, and 
• the likelihood for a positive return increases.  

This is why it is important to have a long-term investment horizon when getting started in stocks.





Summary


While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term.


We do not recommend that you invest in stocks to achieve your short-term goals.


To be effective, you should invest in stocks only to meet long-term objectives that are at least 5 years away.


The longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.




Additional notes:

Though stocks typically perform best over the long term, there can be extended periods of poor performance.  

For example, the DJIA peaked in 1966 and didn't surpass its old high again until 16 years later in 1982.  But the following 20 years were great for stocks, with the Dow increasing more than tenfold (10x) by 2002.

Volatility of the Stock Market

One way of reducing the risk of investing in individual stocks is by holding a larger number of stocks in a portfolio.

However, even a portfolio of stocks containing a wide variety of companies can fluctuate wildly.

• You may experience large losses over short periods.
• Market dips, sometimes significant, are simply part of investing in stocks.

Yearly Market Fluctuations

The yearly returns in the stock market also fluctuate dramatically.  

The highest one-year rate of return of +67% occurred in 1933, while the lowest one-year rate of return of -53% occurred in 1931. 

It should be obvious by now that stocks are volatile, and there is significant risk if you CANNOT RIDE OUT MARKET LOSSES IN THE SHORT TERM.




The Bright Side of this Story

But don't worry; there is a bright side to this story.

Despite all the short-term risks and volatility, stocks as a group have had the highest long-term returns of any investment type.  

This is an incredibly important fact!

• When the stock market has crashed, the market has always rebounded and gone on to new highs. 
• Stocks have outperformed bonds on a total real return (after inflation) basis, on average.  

This holds true even after market peaks.

If you had deplorable timing and invested $100 into the stock market during any of the seven major market peaks in the 20th century, that investment, over the next 10 years, would have been worth $125 after inflation, but it would have been worth only $107 had you invested in bonds, and $99 if you had purchased government Treasury bills.

In other words, stocks have been the best-performing asset class over the long term, while government bonds, in these cases, merely kept up with inflation.

This is the whole reason to go through the effort of investing in stocks.

• Even if you had invested in stocks at the highest peak in the market, your total after-inflation returns after 10 years would have been higher for stocks than either bonds or cash.
• Had you invested a little at a time, not just when stocks were expensive but also when they were cheap, your returns would have been much greater.

Volatility of Single Stocks

Volatility of Single Stocks

Individual stocks tend to have highly volatile prices.

The returns you might receive on any single stock may vary wildly.



Best Performing Stocks

If you invest in the right stock, you could make bundles of money.

• For instance, Eaton Vance, an investment-management company, has had the best-performing stock for almost 25 years.  If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.

Worst Performing Stocks

On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment.

• There are hundreds of dot-com investments that went bankrupt or are trading for a fraction of their former highs in early 2000.

• Even established, well-known companies such as Enron, WorldCom and Kmart filed for bankruptcy and investors in these companies lost everything.

All Stocks in Between these two Extremes

Between these two extremes is the daily, weekly, monthly and yearly fluctuation of any given company's stock price.

• Most stocks won't double in the coming year, nor will many go to zero.

• But the average difference between the yearly high and low stock prices of the typical stock on the NYSE is nearly 40%.

Stocks that don't perform over Long Time

In addition to being volatile, there is the risk that a single company's stock price may not increase significantly over time. 

• In 1965, you could have purchased General Motors' stock for $50 per share (split adjusted).  By May 2005 (4 decades later), your shares of General Motors would be worth only about $30 each.  Though dividends would have provided some ease to the pain, General Motors' return has been terrible.  
• You would have been better off if you had invested your money in a bank savings account instead of General Motors' stock.

All your Eggs in a Single Basket

Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs.

Other times, that basket will hold the equivalent of a winning lottery ticket.