I’m reading a book right now entitled Buffettology written by Mary Buffett, Warren Buffett’s former daughter in law. There is a chapter titled The Myth of Diversifications Versus the Concentrated Portfolio. It portrays a very different perspective on investing that what is generally purported.

“Warren believes that diversification is something people do to protect themselves from their own stupidity. They lack the intelligence and expertise to make large investments in just a few businesses, so they must hedge against the folly of ignorance by having their capital spread out among many different investments.”

While I don’t much care for the tone of this quote, I do happen to agree with it. Most people don’t want to spend any more time than necessary on choosing their investments. All you have to do is look at the very lucrative mutual fund industry to see that this is the case. And when I say “very lucrative”, I’m not talking about the individual investor, but instead, the fund managers.

It’s also interesting to note that the bulk of the gains in these funds usually come from a few well performing investments. Proponents of diversification will say that you need to own many investments because you don’t know which one’s will be the outstanding performers. Those like Warren Buffett will say that you should learn the basics and then some of investing and do sufficient research. This way you will only invest in very secure and highly profitable businesses.

You can choose the style that you feel most comfortable with, but it is certainly food for thought. Why is it that we’ll spend hours upon hours researching all the features and specifications for the new LCD TV we want, and we’re content to just deposit our money into a fund where we most likely don’t even know what it’s invested in. No matter what style you choose, it can’t hurt to learn more about how to choose good investments.

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