Can You Make a Fortune on One Stock?
Buying a stock and holding it while it goes up 5,000% is every investor’s dream. And it’s how some of the real wealth has been created in this country. Bill Gates, Warren Buffet, the Walton family, have gotten incredibly rich that way. But is that even a realistic hope? Let’s look at it another way.
Let’s say someone walks up to you and says “I’ll flip a coin, heads you give me a $1 million, tails I’ll give you $3 million”. And let’s say that it’s an honest coin and an honest offer. It’s great odds. You have a 50/50 chance of quadrupling your money. But how many people could take advantage of it? Not many, because $1 million is more than all but a very few people could risk. No matter how good the odds, you still have a 50% chance of losing $1 million.
There is a similar risk with a stock running up. Let’s say someone bought 1,000 shares at $10 and now it’s at $100. Can they afford to risk $100,000? Not too many people can. It would be prudent to sell some, even if it’s still a terrific stock. But why can’t we be Bill Gates and wait while it rockets to $500? Because unlike Bill Gates, we don’t run the company, don’t know what products are in the pipeline and don’t know what the sales projections are for next year. We don’t have enough information to be Bill Gates.
We probably can’t afford to risk holding a stock while it goes up 5,000%, at least not all of it. We have to diversify, just to spread around the risk.