Page 262

in one basket. Suppose all your investments were made in just one company and by some stroke of bad luck, the company happens to go bankrupt. You would have to kiss all your investment goodbye. Not a very good feeling. With a good variety of stocks across a number of industries, if one or two do not perform, you could at least rely on the others to pull their weight and hopefully on average you would have a fair return on your collective investment in the long run.

Unfortunately most people who suffer losses in the stock market can trace it back to their lack of portfolio diversity. Many times such investors are intrigued by a single stock or a single sector, abandoning all others in favor of the single investment. Often we are told that if we had made an all-out investment in the Internet sector early on, we would have realized astronomical returns in a short period of time. True, but as evident by now, the Internet sector finally imploded, leaving plenty of hopefuls licking their wounds. The gold rush mentality into the biotech sector in the 80s started the same way, and ended in calamity for many who bet it all on this industry.

And still there was no way the Internet sector could continue to flourish indefinitely. Many investors who continued to single-mindedly invest in this sector got burned in the end. In addition, not all Internet stocks were decent performers. There are countless numbers that never made it even in the heyday of the Internet boom. The stock market has and will continue to go through periods where a certain company or industry becomes a hit and the corresponding stocks rocket into the stratosphere, only to come crashing down later on. In 1996, when the biometrics industry was attracting many investors, an obscure company known as Comparator Systems with a seemingly innovative fingerprinting technology rose from $0.03 per share to over $2 per share within three days, a whopping 66-fold increase while breaking volume records on NASDAQ. A few days later the stock was back at …