Larry Swedroe – Beware of Idiosyncratic Risks

BIO: Larry Swedroe is head of financial and economic research at Buckingham Wealth Partners.STORY: Larry chose to invest in an individual bank stock in the mid-80s instead of following his gut to invest in a portfolio of stocks. The bank’s President committed fraud, and the company went bankrupt. Larry lost about 80% of his investment.LEARNING: Avoid idiosyncratic risks by hyper-diversifying your portfolio. “Focus on managing risks and not trying to generate alpha or risk-adjusted outperformance.”Larry Swedroe Guest profileLarry Swedroe is head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with enthusiasm few can match.Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.Worst investment everIn the mid-80s, while Larry was working at Citicorp as the regional treasurer on the West Coast, his colleague and friend convinced him to invest in a company called Jefferson National Bank. Larry happened to believe in two themes that were behind his friend’s recommendation.One, this was a small regional bank, and Larry was confident that the US would allow consolidation to build national banks. So there was going to be a trend of purchasing well-run small banks at premiums to enable the big banks to become national.Two, the bank was located on the border between Canada and upstate New York. There was a military base with a good, sound community, making it suitable for businesses. Larry also believed NAFTA would pass, which would build up the trade in the area.Larry then called a bunch of friends in the banking business and asked them what they thought of this company. Most were impressed by how well the bank was run and the good earnings. Everything seemed suitable for an investor.The President of the bank committed fraud, and the company went bankrupt. Larry lost about 80% of his investment.Looking at hindsight, Larry could have made a much more intelligent bet by avoiding idiosyncratic risks. He could have found a collection of regional stocks with the same advantages as the bank he invested in but without the idiosyncratic risk.Lessons learnedLarry has, over time, developed three principles of investing:Principle one: If the markets are sufficiently efficient, invest in systematic, transparent, rapidly run funds that try to keep their trading costs down with patient trading.Principle two: All risk assets have to have very similar risk-adjusted returns.Principle three: Once you account for all risks, hyper-diversify your portfolio.Actionable adviceIf you need excitement from your life by trying to pick stocks and time in the market, take 1% of your portfolio that you’re willing to lose and go play the market. But don’t take your IRA account to the Merrill Lynch office because you’re more likely to lose it.Larry’s recommendationsLarry recommends reading his book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, so that you can learn from others’ mistakes than make them yourselves. He also recommends books by John Bogle and William Bernstein.Parting words “Ignorance is not an excuse for making mistakes; the best thing you can do is get educated.”Larry Swedroe [spp-transcript] Connect with Larry SwedroeLinkedInTwitterWebsiteBooksAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast