Ramesh Damani and Warren buffet have said you do not need too many investments. They have said that if you find a good deal make sure you bring a truckload of money. Because you might need an even bigger truck to take back the profits. So in short – when you invest in buying a lot of stocks of a particular company – you will be able to earn greater returns when it grows. But this against the concept of diversify your investments. Which one should I choose?
When I started to investment I started with Rs.500/-. It was such a small amount that it did not make sense to diversify. If you are thinking what stocks are available for Rs.500/- then ITC, Bharat Electronics, Exide Industries are few that you can buy. At the beginning, stage diversification does not make sense.
Find good value companies
As I continued to invest I found many companies which are fundamentally strong. Fundamentally strong means they had good financials in their balance sheet. They had good cash reserve, no debt, less fixed costs and their year on year (YOY) profits were increasing consistently. I learn my lessons from the industry experts. If I find a company that I understand and if it’s fundamentally strong then I buy.
During my time in investments, I have found many companies which fit this bracket. Let’s say I have Rs.10,000/- and I invest Rs. 1000/- in 10 companies each. And some companies fail and some companies do profit equally. Then my profits are cut by the loses of the other companies. But if I have invested Rs.2000/- in companies that are very financially strong then I will have only 5 companies. Now the chances of some companies making loses decrease. So if only 2 companies make loses then I still have more profits than loses.
Quoting Warren Buffet
Diversification is an excuse for someone who does not understand his/her investments. If you are very sure then two to three companies is more than enough. Because out of these there will be just one company which will take you to become one of the richest men.
Now I know someone will ask me that “Warren buffet has more than 3 companies in his investment portfolio“. Yes, I agree. But please consider the amount of money he has invested. With 100s of billions of dollar, it doesn’t make sense to have them in just three companies. Those three companies then will have no reason to work and build their profits or balance sheet.
The amount of diversification is proportional to the amount of investments. What Warren Buffet had said earlier is for the common man who is beginning to invest. A common man would at max invest Rs.1 Crore in stocks. With this amount a little bit of diversification is sufficient. Because only then when you hit a jackpot with one company then your profits will increase. So let me tell again what I do. I raise my diversification and add more companies after I reach a certain threshold for one company. I also exit out of a company when I see it consistently doing bad. I cannot give you the exact numbers because it is an internal feeling. It might be different for you if you feel strongly about a certain company.
Just go with logic and believe in your decisions. Don’t listen to the noise and change your decisions. I remember the following saying.
A small contribution when done consistently over a long period of time can make mountain of changes. It will make you reach goals that you once thought were never possible.
Diversify you investments apart from equity too
Till now we have been talking only about the stock market investments and it’s diversification. My financial health doesn’t depend only on the stock market. It would be very foolish and risky to only depend on that. I have some debt mutual fund set as an emergency fund. I will also be starting one mutual fund after a year to set aside money for my short term goals like buying a new laptop and vacation. Yes, these are my efforts to come out of debts. I am not going to use my credit card to buy anything.
Diversify the investments does not necessarily mean in stocks. The above can be considered as diversification too. The ultimate goal is to earn a good return at the cost of not losing the wealth. Please use logic and follow the head (not the heard). If you feel you are doing something wrong get out of it. Stay safe during this Corona virus pandemic and keep your wealth safe too.
Disclaimer: The links to the stockbrokers I shared have my referral link. Click on them will give me a commission. But nevertheless, they are the best out there. I may have a position in the stocks that I have listed here. I never recommend or suggest buying any shares written here. It’s only for example and educational purpose.