“Diversification makes a little sense” - Buffett

 26^th November 2022

“Diversification makes a little sense” - Buffett

Dear All,

Namaste! Thanks, a ton for appreciating our post on Bulls and Bears. Those who understand the secret as we have explained – all are super successful investors in their own way. Today is Saturday and we are bringing up another master quote from the Master Investor – Warren Buffett for Study.

“Diversification is a protection against ignorance. It makes Little Sense to those who know what they are doing.”

This is the whole sentence said by Buffett.

What all NORMAL people are told from day one?

Don’t keep all eggs in one basket. Even your financial advisor/broker / your parents / your grandparents will repeat this sentence. Buffett says – by giving this advice – your advisors are making their future safe. All are giving this call because they are not sure what they are doing and why they are doing it? In most cases – people invested in shares/bitcoins/insurance policies / mutual funds/properties/gold because their smart friends/neighbours/relatives are also doing the same.

They personally don’t think, it’s necessary they should educate themselves for the investments. They think – investing is EASY. Just invest in various asset classes and you are done.

If you are doing this – congratulate yourself. You are in the MAJORITY and the Majority is Middle Class or Poor.

How small Indian investors are taken for a ride with the Wrong Advice?

Indian per capita income is Rs.1.35 Lakh. 70% of the people have this income or below this. Our savings to GDP ratio was 30% in the past years but now it is 18%. It means an average person is able to save Rs.24000 per year on an average income of Rs.1.35 lakh. It means Rs.2000 per annum. With inflation moving up – this figure will be a little lower in the coming year.

Now, the whole world is after this Rs.2000. They have reduced the minimum contribution to Rs.100 in MF compared to Rs.500 in the past. You can buy 1 share of a company. I have seen 50 – 80 companies in a portfolio of Rs.5 lakhs.

In the name of diversification or asset allocation Rs.2000 is distributed among various areas and the end results are that the person remains in the lower middle class or middle class till he dies. The pattern is the same for the person who is earning Rs.13 lakhs or Rs.13 Cr per annum.

I know my MBA / CA friends would die in favour of asset allocation and diversification. They all are miseducated and brainwashed to suit the requirements of big corporations. Let me share with you a small story from PANCHTRANRA. I am sure you would have read or listened to it as a KID.

The Farmer and his Four Sons

Once an old farmer lived in a village. He had four sons. They were always quarreling with each other. The farmer tried hard to bring unity among them but they would never listen to his advice. He was very worried about their future.

One day, the old farmer fell sick and decided he should bring unity among his sons. He called his sons and asked them to bring a few sticks. They brought the sticks. The farmer asked the eldest son to tie them in a bundle. He then asked them to try their strength to break it.

Each of the sons tried to break the bundle but failed. Then the farmer untied the bundle and gave one stick to each and asked them to break it. Each of them was able to do it easily.

The farmer said, “Now you understand. If you are united nobody can get better of you. But if you keep quarreling, you will be broken by anyone.”

Moral of the story: - If your Rs.2000 is invested in a proper asset class and if you keep investing in that – when that asset class moves – you will make a super profit. This is common sense and not Rocket Science. Ideally, I would accumulate this 24000/- in my savings account first before making a meaningful investment at the right time. Investing Rs.24000 for a person who has an income of Rs.1.35 Lakh is a meaningful investment compared to investing Rs.2000 per month.

Why there is an attraction to DIVERSIFICATION?

Normal investors do not want to spend time studying any particular asset class in detail. He does not have the patience for deep study and patience after investing. He hates failure and he wants to keep his image of a successful person intact. By doing focus investments without deep study– he may face failures. He does not want to spoil his image in front of his family members and friends.

So, the best thing is to invest in various asset classes and see the average return as a success.

Why investment is done in the first place?

Investments are done so that you can make a decent return over and above your inflation rate and create wealth at a faster pace compared to normal savings like FDs.

Now, when you unnecessarily diversify your funds – you go for a toss in the long run. In the short run, you may save yourself from a PAIN of fall in a particular asset class but in the long run, you will get PAIN without fail.

Diversification without reason also indicates a lack of conviction in your investments. This is a very bad situation. I have seen 50-80 Scrips in a portfolio of Rs. 5 lakhs as said above!! 

Moreover, when the REAL MANDI comes – all asset classes will go down!! Whether you have diversified or not diversified. But if you have focused investments in a particular class of assets – you will make tons of money during TEJI. Your money will multiply fast.

So, those who are diversifying just to save themselves from MANDI, will not be spared when real mandi or recession comes, irrespective of their diversification of asset classes.

How major money has been made in the World so far by anybody?

I have yet to come across a billionaire who has become a billionaire by doing SIP or investing in MUTUAL FUNDs or investing in different asset classes without any reason.

Major money has always come due to a SENSE OF TIMINGS and FOCUS on a PARTICULAR ASSET CLASS or Particular Company. You have to wait patiently for years to find an opportunity and then take a shot. Buffett was holding a ton of cash before CORONA and he picked up some stocks in the CORONA fall. He was holding USD 130- 140 Billion for the right opportunity. One needs to have a lot of CONVICTION in one’s study/faith in the cyclicity of the market and lots and lots of patience.

This can only come when you know yourself / your market and your investments in detail. Most of the time – people don’t know themselves in detail. So, when they don’t know themselves – knowing the market or any other person is a difficult thing. They have some perception about themselves based on their performance in education – job or business. But investing is a different ball game.

What NEXT?

1.   Know yourself.

2.   Know what you are doing.

3.   Know why you are doing this.

Unless you are having these 3 aces in your hands – you will surely end up being a mediocre performer in your life and investing.

If you need help in Knowing yourself through the science of astrology or investing with focus – you can approach us. Just remember – Accuracy is our Speciality.

Have a focused investment experience.

Follow me on Twitter @hiteshmparikh Or on Whatsapp - +91-9869425399.

Learn a Lesson. Live with Passion & Invest with Reason.

Hitesh Parikh.