{"id":17356,"date":"2023-05-15T23:56:00","date_gmt":"2023-05-15T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=17356"},"modified":"2025-06-10T10:26:13","modified_gmt":"2025-06-10T02:26:13","slug":"diversification-investment","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/","title":{"rendered":"Diversification investment is deadly to portfolios"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#My_Book_on_Diversification_investment\" >My Book on Diversification investment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Buffetts_view\" >Buffett&#8217;s view<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Reward_first\" >Reward first<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Few_stocks_to_bet_on\" >Few stocks to bet on<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Unreasonable_diversification\" >Unreasonable diversification<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Preferred_portfolion_allocation_principles\" >Preferred portfolion allocation principles<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"My_Book_on_Diversification_investment\"><\/span>My Book on Diversification investment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In my two most recent books, both have put portfolio management at the fore, and emphasized Diversification investment is deadly to portfolios. It includes:<\/p>\n\n\n\n<p>In my book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Section 2-1, page 78<\/li>\n<\/ul>\n\n\n\n<p>In my book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010935641?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of 10 Baggers<\/a>&#8220;:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>In section 4-3 of the book, pages 203-213, there is a whole section dedicated to discussing why concentrated investment is needed.<\/li>\n\n\n\n<li>In section 4-4 of the book, &#8220;Portfolio rebalancing may weaken the power of compound interest&#8221;, on pages 214-218, a huge amount of space is spent, and a whole section devoted to portfolio rebalancing is simply unreasonable.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buffetts_view\"><\/span>Buffett&#8217;s view<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buffett set out his detailed views on portfolio diversification and diversification investment in his 1965 letter to shareholders. The following parts in italics are my complete excerpts:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reward_first\"><\/span>Reward first<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em>This year in the material which went out in November, I specifically called your attention to a new Ground Rule reading, We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Few_stocks_to_bet_on\"><\/span>Few stocks to bet on<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em>We are obviously following a policy regarding diversification which differs markedly from that of practically all public investment operations. Frankly, there is nothing I would like better than to have 50 different investment opportunities, all of which have a mathematical expectation (this term reflects the range of all possible relative performances, including negative ones, adjusted for the probability of each &#8211; no yawning, please) of achieving performance surpassing the Dow by, say, fifteen percentage points per annum. If the fifty individual expectations were not intercorelated (what happens to one is associated with what happens to the other) I could put 2% of our capital into each one and sit back with a very high degree of certainty that our overall results would be very close to such a fifteen percentage point advantage.<\/em><\/p>\n\n\n\n<p>The above may make the whole operation sound very precise. It isn&#8217;t. Nevertheless, our business is that of ascertaining facts and then applying experience and reason to such facts to reach expectations. Imprecise and<br>emotionally influenced as our attempts may be, that is what the business is all about. The results of many years of decision-making in securities will demonstrate how well you are doing on making such calculations &#8211; whether<br>you consciously realize you are making the calculations or not. I believe the investor operates at a distinct advantage when he is aware of what path his thought process is following.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Unreasonable_diversification\"><\/span>Unreasonable diversification<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em>There is one thing of which I can assure you. If good performance of the fund is even a minor objective, any portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one billion dollars) is not being operated logically. The addition of the one hundredth stock simply can&#8217;t reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on the overall portfolio expectation.<\/em><\/p>\n\n\n\n<p><em>Anyone owning such numbers of securities after presumably studying their investment merit (and I don&#8217;t care how prestigious their labels) is following what I call the Noah School of Investing &#8211; two of everything. Such investors should be piloting arks. While Noah may have been acting in accord with certain time-tested biological principles, the investors have left the track regarding mathematical principles. (I only made it through plane geometry, but with one exception, I have carefully screened out the mathematicians from our Partnership.)<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preferred_portfolion_allocation_principles\"><\/span>Preferred portfolion allocation principles<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em>The optimum portfolio depends on the various expectations of choices available and the degree of variance in performance which is tolerable. The greater the number of selections, the less will be the average year-to-year variation in actual versus expected results. Also, the lower will be the expected results, assuming different choices have different expectations of performance.<\/em><\/p>\n\n\n\n<p><em>I am willing to give up quite a bit in terms of leveling of year-to-year results (remember when I talk of \u201cresults,\u201d I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year &#8211; one somewhat more sour, probably, than if I had diversified more. While this means our results will bounce around more, I think it also means that our long-term margin of superiority should be greater.<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"160\" height=\"107\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/01\/portfolio-management-1600x1200-1.jpg\" alt=\"Diversification investment\" class=\"wp-image-17361\"\/><figcaption class=\"wp-element-caption\">credit: dreamstime.com<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/\">Diversification investment is deadly to portfolios<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/10\/27\/portfolio-rebalancing\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why is portfolio rebalancing unreasonable<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/21\/why-long-term-investment\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why long-term investment is better?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/18\/why-concentrated-investment\/\">Why concentrated Investment?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/investors-should-pay-attention-to-the-annualized-rate-of-return-irr-how-to-calculate\/\" target=\"_blank\" rel=\"noreferrer noopener\">Investors should care annualized rate of return (IRR), calculate with free IRR Calculator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/13\/why-modern-portfolio-theory-unreasonable\/\">Why Modern Portfolio Theory Unreasonable?<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Diversification investment is deadly to portfolios, Buffett: We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.<\/p>\n","protected":false},"author":1,"featured_media":17361,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36,80],"tags":[],"class_list":["post-17356","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-concentrated-investing","category-portfolio-management"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17356","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=17356"}],"version-history":[{"count":20,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17356\/revisions"}],"predecessor-version":[{"id":36980,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17356\/revisions\/36980"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/17361"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=17356"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=17356"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=17356"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}