While I understand your feelings on diversification, I respectfully disagree.
Diversification is not only a bad idea in general (diversification for the sake of diversification), it also lowers your overall gains due to one industry going down when another goes up.
The way to limit risk is to limit loss. If you buy a stock and set a 2% stop loss on it, you have limited your risk, have you not? You can do this with one stock.
Diversification also comes with the understanding that you need many stocks to diversify. 3 stocks could go up while 1 goes down and that 1 could take all of your profits from the other 3.
The key is to pick stocks properly and then to manage the risk in those stocks (IMO). Diversification is not as important as you might thing. Just because I buy Walmart, doesn't mean I should get something else to reduce my risk necessarily.
The first week I posted on this site I mentioned that Warren Buffet was against diversification and everyone lambasted me as being insane...well...here you go:
In the book "Warren Buffet Speaks" by Janet Lowe, if you look at page 160 of the hardcover edition, she quotes Buffett as saying:
"Diversification is a protection against ignorance. (It) makes very little sense for those who know what they're doing."
also on that page
"A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don't need to own very many of them."
"If you have a harem of 40 women, you never get to know any of them very well."
I agree with Buffett, but I also agree with you and because of that, I use ETF's for the majority of my money. This is my "Safe." It limits my down side risk. I then take the rest and I buy companies based on their performance, location relative to their 200 and 50 day moving averages, their intrinsic value and their debt. I don't care if they're all tech stocks, or all consumer stocks or all internet stocks. That is pretty irrelivant in my mind, especially long term. I choose companies, not industries. Even when consumer buying was way down, Walmart was doing excellent (for example.)
In my opinion, diversification for diversifications sake is a surefire way to not lose as much money, but to slaughter your potential gains. I currently hold 20 stocks and I'm down on 2 of them. Those two wipe out gains from 4 of my gain stocks. I essentially would have made more money sitting the cash from those 6 purchases in a savings account at 1%. My other 14 stocks I am up on greatly. This further enforces my view that I should have chosen less stocks, put more money in my 'sure bets' and not worried about diversifying (one of my stocks that went down was a 'diversifying' industry bet, which was stupid and against my strategy completely.)
In any event, just my opinion, feel free to ignore it. :)
- Takr
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