Diversified Vs Focused

Today the January F&O series expiry and this is a tough start for the year .
From tomorrow new February series starts and expecting market to settle in this month. In last 10days FED cut interest rates by 125 basis points and Reliance Power refund should start from tomorrow which should bring new liquidity into the market . So I am expecting less downside compared to potential upside in this month.

In this post i want to discuss about managing portfolio. We can keep our portfolio either diversified or focused ( or concentrated) .

Diversification mainly helps in mitigating risk by external factors which we can not control . Many people will hold 30 to 40 different shares and think they are diversified but if all the companies fundamentals depends on same events then the diversification is of no use. For example if we hold 10 different banks,10 different auto companies and 10 different real estate shares and if the interest rate climbs up then most probably all the shares will loose their capital . And main drawback in this is we cannot track and act accordingly on all the companies at the same time. So what we get is potentially diluted returns and most of the time index will outperform us .

What warren buffet advices to the investor was to focus your portfolio in as less companies as possible . It is very tough to select 5 to 6 companies in 3000+ companies so you have to do a lot of home work before investing.

So my suggestion is Identify 4 to 5 sectors which are fundamentally different and invest in one company from each sector which can outperform the peers and pay reasonable price to it and hold it for longterm . If you cant identify which share can outperform its peers better to buy mutual funds than buying 4 to 5 companies stocks in all sectors .

In this process we may feel uncomfortable when our shares not performing and some junk shares or going up 20%-30% a day but believe in your conviction and hold the shares without churning portfolio at the end of the day you will be rewarded handsomely. And we also need to look at the returns on our portfolio as a whole and should not look at individual returns means some times some shares might not perform because of the macro factors of that sectors etc .

I suggest diversification in assets compared to diversification in stocks like build 3 - 4 businesses which can earn money irrespective of the economy .

RK