I’m facing a difficult task today. My goal is to try to convince you not to follow one of the most broadly accepted principles of investing: diversification. Of course, since I’m not a widely respected academic or investment guru, I’ve got to rely on quotes from those who actually are. Warren Buffett should suffice…
In his 1978 Berkshire Hathaway letter to shareholders, Mr. Buffett said, “We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.”
In other words, diversification doesn’t make any sense. If the decision is between a company that we really love and one that we’re just ho-hum about, we’d rather invest 100% in the one that we really love rather than dilute our hand with mediocrity.
Warren also said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” That one doesn’t need translation. The greatest investor of all time is clearly not a fan of diversification for sake of diversification.
It doesn’t mean, however, that just anyone just go around investing their life savings in just two or three companies. The key is the “if”. IF you know what you are doing. So how do you know if you know what you’re doing? Continue reading