If you’ve already read tons of stock market reading materials, I’m sure you’ve already come across of the recommendation to diversify your portfolio. Invested in 10 to 20 great companies so that you’ll have a margin of safety. What do they mean by that?
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If you’re invested in 20 companies, and one of them would screw up, you still have 19 left. That way, you protect your capital. It’s even written in the bible that you should diversify, because you can never tell what can happen. Great strategy, aye?
But why am I discouraging you from diversifying?
Warren Buffett once said, “Wide diversification is only required if investors do not understand what they are doing.”
I’m sure for most of you who read this for the first time would feel a bomb explode in your heart. That’s okay. We all had our days. As for me, I was never guilty of diversifying, BUT…But was guilty of being ignorant. As I’ve said, we ALL had our days.
In this post, I’ll share with you why I never diversified, and never looked back.
1K, 10K, 100K or 1M doesn’t make a difference.
I’d like you to think of the day when you were investing for the very first time. Maybe some of you have an initial capital of 25K, while most have 5K. With that in mind, I’d like to ask you two questions, specially to those who are doing EIP:
How many companies did you buy when you started out?
How and why did you come up with that choice?
If I have to answer those questions: I invested in three companies, and I know they are the best of the best, that’s why I invested in them.
Most people do this:
They only have 5K so they invest only in the best companies out there. Let’s say, those were SMPH and MBT. Suddenly, when they already had 100K, their portfolio multiplied quicker than a gremlin on a rainy day.
This is my belief: SMPH and MBT are great companies when you had your 5K, and still remains great when you had your 100K. And would probably still be great when you will have your 1 million. When I earned 133% in one year, ALI was the only company in my portfolio.
Choose one: Invest your 500K in 10 crappy companies or in 2 of 3 blue chips? Warren Buffett, again once said, “You only have to make a few good choices in order to get rich.”
Save yourself from all the headache.
This varies from one person to another. In my whole investment career, I’ve only had at most 5 companies at a time in my portfolio. Why? Because if I go higher, I won’t be able to monitor them properly.
When I say monitor, I’m not referring to just looking at its current price, target price, trend, etc. That’s only half-baked monitoring, and won’t do for me. I read news, target profit, future projects, reported earnings, current challenges, etc (COL Financial provides these items everyday).
For those of you who can pull this off with 10+ companies in your portfolio, then I salute you! Maybe for some of you, this is the reason why you resorted in subscribing in the truly rich club. So that someone will just prompt you to either buy, sell or hold. Maybe. Just maybe.
Minimize, if not totally remove your risk.
You may not believe it, but yes, you can minimize your risk by not diversifying.
Imagine these companies in your portfolio:
JFC: Chinese business facing challenges.
CEB: Downgrading on negative airline industry outlook.
AP: More challenges seen in 2013.
EDC: More challenges ahead.
FGEN: Hydro plant to disappoint this year.
SMDC: Bloom to replace SMDC in PSEi
SCC: landslide could potentially disrupt mining operations.
While these companies face these challenges, they remain good companies with great long-term fundamentals. But can your fear handle it? When these news broke out, share prices dropped faster than you can say I’m going to sell!
Had you chosen your companies very carefully, you could have spared yourself with all the heart attacks.
Quality versus quantity.
This has been a never-ending debate, thus this topic does not need any more explanation. It’s a personal choice that I go for quality companies over quantity.
Why invest in SMDC if there’s SMPH or ALI?
Why invest in EW, SECB, PBB if there’s BPI, BDO and MBT?
In every sector, there’s always the bigger shark that just eats the rest for snack.
You never go wrong with quality. Besides, most beginners that I know go only for quantity because a stock is matunog. Can’t blame them, it’s easy to go with the crowd than against it. On second thought, it’s not that hard, isn’t it?
Lesson from my mother.
If I were to name my greatest mentor, it would be my mother. I learned not to diversify from her. Did you know that she only invested in one company? That would be her employer. Talk about confidence.
You see, my mom works in the finance department of a giant that have been in the business for more than 100 years. Being part of the finance dept, she had access to budgets, earnings, target profit and future projects. She knew what her employer can pull off. That gave her confidence.
She was able to do many things (which I will not mention in this post), and was able to help other people outside our circle because of that one investment.
Conclusion.
Clearly, a non-diversified portfolio can also give you great benefits. And in my book, it has better benefits than a diversified portfolio. Since one has both advantages and disadvantages over the other, neither is superior. It still depends on your own strategy, goals and emotions.
What did I miss?
For those of you who don’t have a diversified portfolio like me, I’d like to know how you’re doing. Were there times that you’re influenced by the mob and jumped to another stock? How many companies do you have today?
If you have a diversified portfolio, are you doing it for the sake of “safety”. Is it worth it?
Do you have companies in your portfolio that you wish to dispose? What’s preventing you from doing it?
Did I fail to mention other benefits that a non-diversified portfolio might have?
