It's been awhile since I posted well this has been basically
because of the heavy workload that has been there and I recently went back to
school to do my CFA and my work load hasn't been any lighter. Nevertheless
there has been so much to talk about ranging from the JKIA fire to the
announcement of the 5 billion dollars in investments that the president was
able to bag in China. Today though I thought of discussing something completely
different and that is the concept of diversification.
The concept of diversification is basically a method where
investors instead of focusing on a single asset spread their risk on a number
of assets the logic here being that by reducing their exposure to a single
asset investors have reduced the risk that they are taking on, it is basically
not to put all your eggs in a proverbial single basket. So it is this concept I
want to challenge today.
Warren Buffett has long held that it is better to hold on to
five good assets than holding 50 and personally I agree with this, a quick look
at the Forbes 500 billionaires almost 70% of them are entrepreneurs that have
turned their businesses into corporate mammoths. With this in mind you can ask
yourself that as an investor when analyzing where to put your money, where to
keep it and the likes in which scenario would you have a better understanding
of what your investment really entails, as an investor in five companies or 50
if we confine ourselves to listed companies?
And even in your own private businesses the concept of
diversification has often led to many businesses collapsing because of lack of
enough concentration by their over-stretched owners an example would be of two
very well off entrepreneurs that I personally know one of them let’s call him
George is a large force in the real estate sector with properties valued in the
billions and he also owns a three star hotel in his bid to diversify from what
he termed his over-reliance on the property for his income decided to venture
into selling motor-cycles, he even started an alcohol manufacturing company
among many other businesses with all of
them being shut down having accrued tons of debt that he painstakingly cleared
by selling some of his real estate holdings, Investor B let us call him Sam had
a business that supplied items but when he decided to diversify of the only
divestments that he did only the real estate venture was able to hold. His
supply business suffering from his lack of concentration and the constant
capital withdrawals so that he can be able to finance the other ventures
suffered and is no longer the booming business it once was.
In the world of finance where it is very risky to hold one
financial asset it would be extremely imprudent to hold one asset unless of
course these are government bonds but it would also be extremely imprudent to
be holding shares in 20 companies when will you do an analysis on these items
when do you know if your asset is collapsing? When can you do very detailed
analysis?
Investment firms have
research departments that do careful analysis on their held assets and for the
prospective assets they want to invest in full time as an individual you have
neither the freedom to do this nor the
financial resources to hire one to be doing this for you. My advice to you is
when you invest one thing concentrate on it fully if you are in real estate and
want to get into shares put your money with an asset manager who has the time
and a research department to get into the nitty gritty, build your real estate
and concentrate on it.
In conclusion it is my belief that by diversifying you don't
reduce the risk you are taking on but are actually increasing by not allowing
yourself to do a proper analysis on your investments and hence increasing the
chances of making a bad one.
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