The Motley Fool reveals how buying one company at a discount gives you instant sharemarket diversification.
The wise tell us diversification is good.
Academics have shown that diversification delivers higher returns for a given risk. Most professional fund managers espouse the benefits of diversification.
However, some of the world’s greatest investors, like Warren Buffett, have benefited from concentrating their investments. They have outperformed markets by concentrating their investments, rather than watering down their best ideas with diversification.
Diversify or concentrate
So should individual investors concentrate or diversify their investments? I’m sorry to say the answer is, it depends. The good news is that the answer is still straightforward.
Whether you should diversify or concentrate your investments depends on your experience, and the effort and intensity you’re prepared to bring to investing.
The lower your experience the more you should diversify. The less interested you are in spending hours each day exploring businesses, the more you should diversify.
Warren Buffett estimated that means at least 98% of people should ‘extensively diversify and not trade’.
Conversely, diversification is a terrible mistake for investors willing to bring the effort, intensity and time to investing. Buffett believes enterprising investors can diversify with as few as six companies.
Let’s summarise where we’ve got to, with a quote from Buffett. “Wide diversification is only required when investors do not understand what they are doing.”
One company deliver instant diversification
Wide diversification generally means investing in index tracking funds. But what if you could diversify by buying just one company? What if, that one company gave you both diversification and a chance at beating share market indices?
Argo Investments (ASX: ARG) is such a company. The Adelaide based Argo is an investment manager with a long track record of market-beating returns. This one company delivers instant diversification and a shot at outperforming the market.
What’s even better is that Argo currently trades at a (ASX:ARG) Price to Tangible Book Value 10 year chart" href="https://www.fool.com.au/wp-content/uploads/2011/09/ARGO-investment-ASX-ARG-price-to-tangible-book-value.png">discount to its underlying assets. The majority of those assets are major Australian companies, like BHP Billiton (ASX: BHP), Westpac Banking Corporation (ASX: WBC), Telstra Corporation (ASX: TLS) and Woolworths (ASX: WOW).
Foolish bottom line
Buying shares in Argo is like buying the best Australian companies at a discount.
Conservative investors should also consider diversifying across time by dollar cost averaging into Argo while the current share market sale continues.
If you’re an enterprising investor looking for more ASX shares, look no further than this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 Oil. Click here to sign up now.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of February 15th 2021