Diversification (Real Estate versus Stocks)
It’s not so bad to have one’s money scattered over three wonderful investments. Suppose you were a real estate investor with a 1/3 interest in the best apartment complex in town, the best mall, and so on. Would you feel like a poor, undiversified investor? No! But as soon as you get into stocks, people feel this way. Partly, people need to justify their fees.
What are your views on diversification? Source: Emory’s Goizueta Business School and McCombs School of Business at UT Austin
If you really know businesses, you probably shouldn’t own more than six of them.
If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don’t diversify personally.
“Know what you own, and know why you own it.”
A Consistent Focus: Companies that stray too far from their base of operation often end up in trouble. Peter Lynch also avoided profitable companies diversifying into other areas