Canadian Dividend Investors
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Avoid Over-Diversification
This worshipping at the altar of diversification,
I think that is really crazy.
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Charlie Munger
Charlie Munger was Warren Buffett’s partner in Berkshire Hathaway from about 1979 until Munger’s death in 1999. Charlie had trained as a meteorologist and a lawyer and never took a single college course in economics, marketing, finance, or accounting. Nevertheless, he became a leading business and investing genius. He was a man of few words and became well-known for his pithy comments on the financial industry.
Some diversification of your holdings is recommended, even with a dividend investing strategy, so that if one company in your portfolio is financially unsuccessful or goes bankrupt, only a portion of your retirement savings will be affected. However, as indicated by the foregoing statement, Charlie pointed out that most investors are over-diversified and hold so many companies, that it is impossible to adequately monitor the financial performance of each holding, with the result that their overall returns are mediocre.
We can obtain some guidance with respect to the number of companies you should hold in your portfolio, by referring to the number of companies held by Warren Buffett and other successful money managers, as reported by Hagstrom , as well as two other money mangers who achieved exceptional returns, as reported by Benello et al. , as summarized in the following table:
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As indicated, these managers held anywhere from 5 to 30 companies in the very large investment funds they managed. In addition, these managers made no attempt to equalize the proportions of the fund's assets held in each company and, in fact, some managers concentrated most of their fund's assets in just 2 or 3 companies, with smaller amounts allocated to the other companies in the fund.
Many folks who have a career and family commitments, in addition to their investing activity, find that they can successfully manage somewhere between 5 and 15 different companies. In my case, I found that I could easily manage 10 different holdings.
1. Clark, D., 2017. The Tao of Charlie Munger. A Compilation of Quotes from Berkshhire Hathaway's Vice Chairmen on Life, Business, and the Pursuit of Wealth. Simon and Shuster, New York, NY.
2. Benello, A.C., Van Bieman, M., and Carlisle, T.E., 2016. Concentrated Investing, Strategies of the World's Greatest Concentrated Value Investors, John Wiley & Sons, Inc., Hoboken, NJ, p.106
3. Hagstrom, R.G., 1999. The Warren Buffett Portfolio, Mastering the Power of the Focus Investing Strategy. John Wiley & Sons, Inc. New York, NY pp.40 to 58