“Don’t place all your eggs in one basket”
If you’ve had some experience in the stock market, you’ll no doubt have heard of this before.
It’s a fundamental risk management strategy where you mix a wide variety of investments within a portfolio.
The idea is that by doing so, you smooth out unsystematic risk so that the positive performance of some investments neutralizes the negative performance of others.
In other words, when one investment zigs, the other zags – so to speak.
It’s a big part of my personal investing and trading strategy.
However, I often get challenged by others occasionally who tell me things like:
“That’s just silly. I prefer to invest the Warren Buffett way and focus on a few specific industries and stocks I understand intimately.”
While I understand Warren’s method and the advantages it carries, I consciously decided many years ago not to follow his way of doing things.
And it has worked really well for me over the last 20+ years.
Why I Decided Not To Copy Warren Buffett’s Strategy
Warren Buffett is a very intelligent investor with a near-photographic memory.
He has a knack for remembering the financial figures of companies off the back of his head, and there are many reported accounts of this.
One particular example comes from his biography The Snowball: Warren Buffett and the Business of Life, where Buffett’s close confidant and author Alice Schroeder mentions:
“He digested the monthly, weekly, and daily reports faxed, mailed, and e-mailed by the businesses that Berkshire owned, a list that grew longer year by year, telling him
- how many auto policies GEICO had sold last week and how many claims it had paid;
- how many pounds of See’s Candies had sold yesterday;
- how many prison-guard uniforms had been ordered from Fechheimers;
- how many jet time-shares NetJets was selling in Europe and the United States;
- and all the rest—awnings, battery chargers, kilowatt-hours, air compressors, engagement rings, leased trucks, encyclopedias, pilot training, home furnishings, cardiopulmonary equipment, pig stalls, boat loans, real estate listings, ice cream sundaes, winches and windlasses, cubic feet of gas, sump pumps, vacuum cleaners, newspaper advertising, egg counters, knives, furniture rentals, nurses’ shoes, electromechanical components.
All the numbers on their costs and sales poured into his office, and he knew many of them from memory.
Buffett also reportedly spends about 80% of his day reading, going through about 6 newspapers a day, and considers the reading of financial statements to be a hobby.
Now I don’t know about you, but I wouldn’t exactly classify myself as a genius on that level.
If you’re like me, you also probably don’t have the time (nor the enthusiasm) to be reading and memorizing financial statements from companies in a select group of industries.
Is it still possible to concentrate your investments and trades in a similar fashion and succeed?
Absolutely. Here’s how…
How to Concentrate on a few Select Industries and Stocks, and Succeed
Like I mentioned previously, you will need to really make sure you understand those industries and stocks you’ve chosen inside-out.
Most likely, you will need to spend most of your day researching or hire a team of investment analysts.
But here’s the catch – you won’t be able to sleep well at night.
Because if at any moment one of your investments or trades goes belly-up, you’ll lose a sizeable chunk of your hard-earned capital.
For these reasons, I consciously chose not to invest like Warren Buffett.
Instead, I’ve taken parts of his system that I can replicate comfortably (Fundamental Value Investing), and added other components on top to create a system that allows me to:
- still buy into great companies for cheap prices
- succeed without having to spend all my time constantly building and updating my knowledge of specific industries and stocks
- sleep well at night knowing I’m always protected
- spend more of my free time on the things I find fulfilling and meaningful
In summary, just because a system works for someone else, doesn’t necessarily mean that it’s a good fit for you.
Instead of blindly copying someone else who’s successful, find something that works for you, matches your personality, and fits into your lifestyle.
Terry ‘The Freedom Trader’ Tran