Either I'm misunderstanding your argument or you are missing a fundamental tenant of finance (and indeed, most things in life). Higher returns typically comes with higher risk. A brand new startup is high risk with high reward if it pays out. The same thing applies to financial investments in high risk companies.
People take risks because they want to try and beat the historical growth in their portfolio. By taking on that risk, they know that they may lose money instead of grow their money.
Diversifying allows them to adjust how much risk they want to take above the standard market growth.
"Great Companies" is such a bad guide star for investing. Sears looked like a "great company" 10 years ago. Kodak? Any big box retailer?
Anyway, there are perfectly sound investing theories that say investing in the worst companies can result in higher returns than any "great company" investment portfolio. Value investing at it's most extreme. You just need a few of the losers to become mediocre to make huge gains, while trying to get great companies to grow past their high stock price is extremely hard.
I agree with your long-term strategy...but I don't see any reason to hold long-term stakes in individual companies. Why not just hold long term on index funds?
Risk and return are not correlated. There are risks and there are returns. See AAA bonds during GFC. Great businesses are great companies at reasonable prices not overvalued growth stocks.
Most of modern economic and finance theory is based on fundamentally broken models of risk and return.
Known risks and future returns are certainly correlated. Unknown risks (financial crisis meltdown) are obviously uncorrelated because they are unknown. You can't control for those, which is why you diversify.
What are you going to do when your "great company" has a horrible CEO scandal and sinks the company? That's an unknown risk that would be prevented by diversifying your investments.
Known risks (such as "can this company execute it's vision well enough to be profitable at 500m revenue/year?") are what you weigh against the return ("I personally think so, but the market doesn't, so I'm getting a discount on the stock price when it eventually succeeds").
Either I'm misunderstanding your argument or you are missing a fundamental tenant of finance (and indeed, most things in life). Higher returns typically comes with higher risk. A brand new startup is high risk with high reward if it pays out. The same thing applies to financial investments in high risk companies.
People take risks because they want to try and beat the historical growth in their portfolio. By taking on that risk, they know that they may lose money instead of grow their money.
Diversifying allows them to adjust how much risk they want to take above the standard market growth.
"Great Companies" is such a bad guide star for investing. Sears looked like a "great company" 10 years ago. Kodak? Any big box retailer?
Anyway, there are perfectly sound investing theories that say investing in the worst companies can result in higher returns than any "great company" investment portfolio. Value investing at it's most extreme. You just need a few of the losers to become mediocre to make huge gains, while trying to get great companies to grow past their high stock price is extremely hard.
I agree with your long-term strategy...but I don't see any reason to hold long-term stakes in individual companies. Why not just hold long term on index funds?