We all have heard the proverb "don't put all your eggs in one basket"
Well, while it is a wise thing to do as far as eggs are concerned, for stocks it should be followed with care!
While diversification, being a defensive strategy, is good for capital protection, it rarely increases your wealth in leaps and bounds!
Warren Buffet once termed a portfolio of 40 stocks as a Zoo and not a portfolio!
He had opined that focusing your investment seems risky but isn't really.
According to Buffet, if focusing your investment in a few stocks makes you do your homework intensely then that is very healthy.
"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing." Buffet says.
At the end of 1999 and 2000 Buffet's company Hathaway Berkshire had 70% of its investment funds in just four companies.
It is "too hard to make hundreds of smart decisions."
Even Peter Lynch said : "The smallest investor can follow the Rule of Five. The part-time stock picker probably has time to follow 8-12 companies."
"Owning stocks is like having children--don’t get involved with more than you can handle."
"All stocks in the portfolio have to pass some stiff tests and you will not know if they pass the tests unless you are able to spend time analyzing them."
Philip Fisher had rightly warned :
"......buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification."
To sum up in Warren Buffet's words : Diversification may preserve wealth, but concentration builds wealth.
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