A lot of people recommend broad diversification. It seems as though the general thought is increasing diversification decreases risk. My perspective on this is somewhat different. People who don't do research, which is almost everyone, benefit from diversification. The more the better. People who do a lot of research, are disadvantaged by diversification. If there are four companies you know extremely well and you hold 12 stocks, the four best performers should be the four you know. If they are not, then your research was not effective. Diversification dilutes research. For a well researched value investor, it's better to stick with what you know. In my case, I own 11 companies. I'm intimately familiar with five companies and only somewhat familiar with six. The five companies I'm most familiar with are my best performers, by a wide margin. As the well researched companies have pulled away from the lesser researched companies in my portfolio, I have resisted the urge to balance them. Why would I take money from a great performer and invest it in a company that is a modest performer? Again, for most people, the more diversity the better. This post is the perspective of a well researched value investor who believes it's not possible to be intimately familiar with a large number of companies. I spend a lot of time keeping on top of the five I do. I'm interested to read other perspectives on this.
