What Buffett Says About Diversification Will Shock You

Working for StreetAuthority, I do a lot of different things.

In the course of a day, I may be writing an article… editing a newsletter… discussing potential picks with our staff… researching the next investing hotspot… even working with a development team on our new StreetAuthority website (shhh… it’s still a secret!).

And with so much going on, I actually find myself a little frazzled as the day goes on.

To combat this, I’ve started getting to work about an hour earlier than the rest of the staff. I don’t do this to show off, but found I can do more in that one hour (when I could simply focus on one task without distraction) than I could in two hours when the rest of the staff has the office buzzing.

Turning off the background noise allowed me to simplify things — and get better results.

What does this have to do with investing? A ton.

Why Diversification is Like Drinking From a Fire Hose
Sometimes the investing waters are as clear as mud to retail investors. After all, there are literally thousands of potential plays out there.

You could try to play a rebound in the automakers. You could day-trade the banks, profiting from their roller-coaster moves. You could stick with index funds and ride out the storm. You could even try to find companies that are simply undervalued and will rebound once this crisis passes.

But the problem is that there are too many options — it’s like trying to drink from a fire hose. Too many choices make it hard to nail down the one investment that will make your portfolio a winner.

Instead, like I do every morning by getting an early start, I think successful investors need to turn off the distractions and focus their attention to a small group of the best ideas… drink from a glass, instead of a fire hose.

By shrinking your portfolio, you’ll find:

It’s easier to stay on top of your investments — If you have a portfolio of 50 stocks, how well can you pay attention to each one?

Even if you read up on each one just an hour each week, you’d have a full-time job (plus 10 hours of overtime) just to give each its due.

And with this market, it’s more important than ever to watch your holdings. Instead, a portfolio of just 10-12 of your best picks would need significantly less time to track each week and you’ll likely sleep better at night knowing you’ve done your homework.

Better Portfolio Performance — Which do you think would average higher on a test: An entire class full of students, or a handful of the smartest students as picked by the teacher?

The answer is obvious… and it’s the same with your portfolio.

Look through your holdings. If you have upwards of 30, 40, even 50 holdings or more, I bet you’ll find some that you think are simply “OK.” Hell, it wouldn’t surprise me if you have some you don’t even like but simply haven’t sold yet.

Instead, what if you culled down your portfolio to just your favorite picks? Wouldn’t your portfolio be in much better shape going forward? You’d have the cream of the crop, instead of the entire field. Remember, it’s hard to outperform the market if your portfolio is the market.

That you’re not alone in trimming down your portfolio — Warren Buffett’s Berkshire Hathaway holds just 41 positions. That’s a lot for an individual investor, but for a company with billions at its disposal, it’s surprisingly few. On top of that, over the past 25 years Berkshire’s top five holdings have made up an average of 73% of its portfolio.

Buffett is simply a proponent for positioning a portfolio to take advantage of the best picks. He’s even gone as far as saying:

     “If it’s your game, diversification doesn’t make sense. It’s crazy to put money
     into your 20th choice rather than your 1st choice. It’s the ‘LeBron James’
     analogy. If you have LeBron James on your team, don’t take him out of the
     game just to make room for someone else. If you have a harem of 40 women,
     you never really get to know any of them well.”

If the world’s greatest investor is following this tact, shouldn’t other investors?

That’s Why We’ve Launched
StreetAuthority’s Stock of the Month
This sort of thinking is why we’ve recently launched our latest newsletter — interest rates, the dollar, or what the Fed is up to — because every “bad” economic development actually helps some investment or other.

The recession has been a bonanza for for-profit education companies as tens of thousands of laid-off job hunters sign up for retraining. In the past year the stock of Apollo Group (Nasdaq: APOL) has jumped +34%… ITT Educational (NYSE: ESI) is up +88%.

Companies that cater to tougher economic times are doing well, too. Ross Stores (Nasdaq: ROST) is up +21% over the past year… Family Dollar (NYSE: FDI) is up +73% … and Dollar Tree is up +47% (Nasdaq: DLTR).

If you are simply investing with broad index funds, then you’ve missed these opportunities. But that doesn’t mean you have to forever. Follow this link to learn how you can join me and this simple approach for less than $20. But act quickly, this introductory offer won’t last much longer.

P.S. If you like to learn more about my newsletter — and why StreetAuthority is so confident about Stock of the Month, visit this link.