Diversification should not be overestimated. The number of shares does not directly indicate the extent of diversification, if their number is not in the tens. The business operations of individual companies can also be diversified. Most of the business operations of companies listed on the Helsinki Stock Exchange take place around the world. The companies' customers can operate in different industries. One example of this is the chemical industry. In addition, the companies owned by an investor can operate in the same industry and fight against each other.
Fisher wrote: “Generally, high diversification does not indicate a brilliant investor but an insecure individual.” A large part of investments go to mediocre targets when an investor spreads his money across several stocks. In addition, it is difficult for an investor to follow a large number of companies. There is so much fuss about the dangers of concentrated portfolios that investors buy so many stocks that they do not know enough about their investment targets. Investments made with insufficient information are probably more dangerous than too little diversification.
The need for the number of different share classes depends on many things. An investor can get the same diversification by investing in five stocks as in fifty. Many companies have diversified businesses, while others have concentrated businesses. Buffett's Berkshire Hathaway is diversified. As the number of cyclical stocks increases, more diversification is also needed. Companies with one client or one top executive also need greater diversification than companies with several. Everyone's situation is different, and Fisher divides investment targets into three different types for diversification purposes.
A) Large companies that grow earnings and business. Individual companies should not account for more than 20% of the entire portfolio at the time of purchase. In this case, the investor should have at least five companies. The businesses of the companies should not overlap. If this is the case, diversification should be increased. Fisher points out that companies that grow earnings and business should not be sold for diversification reasons. Instead, the investor should be confident that the company's future will continue to be as bright.
B) medium-sized companies that grow earnings and business. The share of individual companies must not exceed 10% of the portfolio at the time of purchase, i.e. the portfolio must contain shares of at least ten different companies. These companies must have a good management team with several qualified members. Their business activities may overlap somewhat.
C) Small companies that can generate large profits and losses. The share of individual companies must not exceed 5% of the portfolio at the time of purchase, i.e. the portfolio must contain shares of at least twenty companies. Only money that can be safely lost should be invested in these companies. These companies usually either fail or develop into B-group companies, as long as the top management gains more depth, the business grows and competitiveness develops.
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