I am serving my In-Camp-Training (ICT) this few weeks. For me, ICT is always a time to take a breather from work, where camp mates get together to "talk cock sing song" aside from the military duties on our shoulders. Incidentally, I chatted to two camp mates about investments in stocks. Let’s call them camp mate Mr. A and B. Both of them salaried employees and invest as part timers currently.
Mr. A – Only Concentrate on One to Two Stocks?
Mr. A who is just married, told me he is planning to quit his day job soon. It has always been his aspiration to stop work as a salaried employee when he reaches age 35. Now his age the time has come. This is because not only is his age criteria fulfilled, but he had profited from the raging stock market lately. After Mr. A quit, he will devote full-time on stock market. Mr. A is neither a value investor nor a trader. “Any style, as long as it earns money!” Mr. A said with a wide and confident smile. According to him, he only trade US stocks and normally only hold 1 to 2 stocks. His winner is "Apple!" Strategy is simple. “Just keep focusing on these 1 to 2 stocks, buy and sell, to profit from it.” I was told.
Mr. B – Only Concentrate on One Sector
Next up is Mr. B, a family man with two kids. While idling and checking my stock portfolio on phone, Mr. B glanced and out of curiosity, asked those are stocks portfolio. “Wah so many stocks”, he asked. “Yes, more than 20 in SGX”, I replied with a smile. On the contrary to me, Mr. B only hold few stocks, only invested on NYSE, and punt mainly on banking stocks. I then queried if it is a risky to concentrate investments on one sector. Mr. B explained without qualms that his strategy is sound. “Banking stocks are going to enjoy the uptrend when Fed raise the interest rates!” Mr. B said.
So there you have it. Absolutely NO diversification for campmates A and B. One focus on a particular stock while another focus on a particular sector. Other similarities are; both only invest in US stocks now! Both are very confident about their strategies and none mentioned about the “What If” black swan situation.
Diversify or Not?
So THE Million Dollar Question, "Diversify or Not?"
Different people adopt different school of thoughts. Perhaps it is most appropriate to hear from the most successful investment gurus of all time as follows, before we decide.
“Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
Warren Buffett has often opposed diversification as an investment strategy, while Buffett's master - Benjamin Graham, on the other hand viewed Diversification as a key idea of achieving market beating portfolio returns.
Benjamin Graham says:
“Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion.”
“If you want to make a lot of money, resist diversification. Brokers promote the motion that everybody should diversity. But that is mainly to protect themselves. The way to get rich is to find what is good, focus on it, and concentrate your resources there.”
Peter Lynch certainly do not subscribe to the belief of restricting investments to only few stocks. He held as many as 1400 stocks as a portfolio manager at one time. Lynch have faith that as long as few out of the many stocks becomes a multi-baggers, we will be a winner.
However Lynch do mentioned that over-diversification can be termed di-worsification which is inefficient diversification.
“There is no point in diversifying just for the sake of diversifying, particularly if it means less familiarity with the firms. Investors should own however many "exciting prospects" that they are able to uncover that pass all the tests of research”.
Lynch also suggests investing in several categories of stocks as a way of spreading the downside risk. On the other hand, Lynch warns against investment in a single stock.
I am definitely no Guru like anyone of the above. I am just an average home-based conservative investor. As a non-professional, who neither have long hours gluing to the market charts, nor guts to stomach big risk, I will go with diversification to reduce my risk. Ultimately my aim is simple – to gain market index beating returns and compound.
Buffett and Jim Rogers' approach of non-diversification should work well for discerning investors like them, or other professional investors, but perhaps not everyone are like them.
Nevertheless if you shared the same strategy with my campmates aforementioned, who are part timers, and only invest in single stock or sector, please bear in mind that when Market swing drastically in the opposite direction, things can turned sour really quickly against your favour.
Whether which strategy is right or wrong pose little significance here. Essentially we ought to have a clear-mind of what we are doing, be responsible of our action and most important of all, know what to expect if things take a drastic turn!
So how about you? Diversify or Not?