'Diversification' is one of the most overused words when it comes to investing.
Too many investors are under the impression that to be successful, you need to own a vast array of companies.
That's only true to a certain extent. Sure, it's definitely important to not put all your eggs in the one basket. Such a decision could prove catastrophic if your investment thesis fails or if some unforeseen situation plays out.
But then again, being over-diversified can be just as problematic as not being diversified enough. By buying too many companies, you are essentially crossing the border between protection and, almost certainly, mediocre results.
Consider these three quotes from legendary investor Warren Buffett…
"We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts."
"Diversification is protection against ignorance, it makes little sense for those who know what they're doing."
"Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful."
It's that last point that I want to touch on a little more. While it can be exciting adding a new position to your portfolio, sometimes the absolute best investment is one that you already own.
After all, if you've bought it in the past, you should have a fair (if not excellent) understanding of the company and its potential. Sure, it might have shot up in price since then, but if it's still in your portfolio then you must be confident it will climb even higher, over time.
In light of the market's recent setback, a number of the stocks that I already own have retreated heavily in price. Although gluttony is one of the seven deadly sins, when it comes to investing it can be one of the most rewarding things for your portfolio.
That's why I'm considering buying more shares in Coca-Cola Amatil Ltd (ASX: CCL), Veda Group Ltd (ASX: VED) and Yellow Brick Road Holdings Ltd (ASX: YBR). Each represent fine businesses with strong management teams and extremely promising futures which I believe could be amongst the greatest opportunities on the ASX right now.
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