Diversification of the best, not the most

An investor should always realize that some mistakes are going to be made and the he should have sufficient diversification so that an occasional mistake will not prove crippling. However, beyond this point he should take extreme care to own not the most, but the best. In the field of common stocks, a little bit of great many can never be more than a poor substitute for a few of the outstanding.

- Philip Fisher

The purpose of diversification is to protect from the mistakes and not for the sake of it. By keeping the list minimum (probably less than 20), the investor keeps the list of seats available to fill to the bare minimum. Thus if a new stock looks much more attractive than your existing holdings, one of them has to give way to new stock instead of simply increasing the stock count by 1. This places an onerous responsibility on the investor to judge his decision before a new stock is added to the portfolio. I am not saying that the investor should steadfastly stick to certain limits.

This blog writer knows the fallacy of the diversification. At points in time when the list of stocks was more than 100, I found it difficult even to identify whether I own the stock or not!!!. Once I understood the foolishness of too much diversification, I took the step of moving out of the marginal stocks. Further investments were made only in the existing holdings, while I slowly eliminated the unwanted ones one by one. I deviated from the above decision only twice, when I took the conscious decision to add two wonderful stocks. While I don't have any fixed nos for my portfolio in my mind I would like to reduce it to less than 30.