Despite Flo's excitement that headline is misleading.
In posts that talk about stock picking versus all-fund portfolios versus some combination of the two, comments get left opining that stock picking is difficult or risky or whatever. So, for the fund investor who goes narrower than a SPY/EFA/AGG mix, could they spend the time and do the work to own three stocks from themes that were especially compelling to them for which there was no sector or country product?
Sticking with three narrow themes for which I have no exposure, let's say an investor believes Cyprus (oh yeah, there's a stock market there) is the place to be. Well, for that person there is only one choice (that I know of), The Bank Of Cyprus (OTC:BCYPF), and it has been a pretty good proxy for the General Index of Cyprus (year to date the bank is down 28% and the index is down 29% and the charts look identical).
How about shipping stocks? A lot of people seem to like these, the story is clearly compelling (stuff's gotta get there from here) and many of them pay very large dividends. There are quite a few stocks that are in shipping one way or another, but no sector fund to own.
Lastly, let's say an investor thinks the plane-leasing stocks are going to finally turn around (they have been bludgeoned); there's a handful of these, but no fund. Some of them capture the growth in passengers in places like India, and if they can get their cash flow squared away they offer the chance for enormous dividends.
To be clear, I don't own any of the three, but I've tried to learn a little about them and do watch them to varying degrees.
So the question is, could a fund investor reasonably learn about two or three or four disparate themes and devote 5% or maybe even 10% of the portfolio to them while putting the rest into some sort of well planned, properly diversified combo of broad-based ETFs or, if they are so inclined, sector funds (properly weighted)?
This is obviously core and explore. As far as the risk of individual stocks, let's start with the premise that regardless of anyone's stock-picking acumen, it not difficult to discern when a stock is a lottery ticket, like a biotech whose only drug is in phase 1, or a mining company that has never actually mined anything. So that pretty much rules out a one-day 75% hit to one of the three stocks.
The realistic risk from a bottoms-up problem (meaning the wrong stock was selected), as opposed to a top-down problem (like you buy a Chinese stock that cuts in half at the same time the market cuts in half), might be from an earnings problem, which is usually no worse than a 20-25% hit (that is a relatively extreme reaction but of course there has been worse).
Another risk might come from something like losing out on a contract, as recently happened to Boeing (NYSE:BA), although the immediate impact was quite mild.
One last risk that seems to come up a few times lately (to be clear this is in no way an exhaustive list of risks) is some sort of balance sheet/accounting issue which again seems to max out at worse with a 20-25% immediate reaction.
One risk that is not very likely is fraud. If the probability of fraud is low, then the probability of owning more than one fraud stock at the same time is incredibly low.
Additionally 2-3% each into three different stocks from different themes can mitigate some of the top down risk (like owning three discretionary stocks late in the cycle). Combine all of that with some sort of stop loss strategy on the three, and the risk would seem to come in off the ledge a little bit.
The point of all of this is not that you should go out and buy stocks today. But if the only way into an important theme important is with a stock, you should be open to the possibility of buying a stock.