Bill Ackman thinks so! He’s a hedge fund manager at Pershing Square Capital Management.
In a talk last week, he said that individual investors use diversification because they are too lazy to research stocks and figure out which are the best to own.
The commenters on this post seem to think Ackman is just an arrogant prick. Maybe he is; I have no idea.
But I happen to think he’s correct on this point. Way too many individual investors just run out and buy up dozens of stocks and throw ‘em in a portfolio. With that many stocks, there’s just no way you can keep track of developments at the companies, to know whether you should buy more shares, hold, or sell.
As Ackman says, “They haven’t done enough research into any of their companies. If they’ve got 200 positions, do you think they know what’s going on at any one of those companies at this moment? As a result of overdiversification, their returns get watered down. Diversification covers up ignorance.”
It sounds harsh, but he’s onto something. Lazy may not be the reason that folks buy too many stocks. But a lot of people are unaware that they can get better returns by staying focused on only a few companies, and buying and selling at the right times.
Keep your portfolio limited to a small number of stocks. That way, you can keep up with industry developments, earnings dates, new product announcements, possibly damaging news and other information relevant to a stock’s price.
If you are investing only a few thousand dollars, limit your selections to two or three stocks. As you invest more, you can add more stocks – but keep it under 10. Actually, 7 or fewer is preferable.
I know this goes against the grain of what most people do. But are “most people” doing well in the market? I think you know the answer to that!
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