2 Necessary Conditions For Portfolio Diversification - Warren Buffet Approach

2 Necessary Conditions For Portfolio Diversification - Warren Buffet Approach


I bet you must have been told at one time or another not to put all your eggs in one basket before right? No doubt diversification is a must but how many stocks you should buy and how much money you should be investing in each stock is depends on these 3 necessary conditions for portfolio diversification.

In return, you'll be having the best asset allocation strategy that will effectively utilize all of your hard earned money now and forever.

How Knowledgeable Are You

To make the most money from stock market, invest in what you know the most. You must know the company inside out. At least, you must understand its business model, which industry the company belongs to and how the profit was generated. Also, don't forget to spend enough time to understand the nature of its business, effectiveness of its management as well as the unique selling proposition of its products or services compared to its competitors.

From there you can decide if the company is a great investment opportunity indeed.

But the main problem that most novice investors have is they don't know where to start. They just don't have idea which stock they know the most. Unlike Warren Buffet who has been taught about stock investing since he was 11 years old, most of us need to start from bottom. You can either start with something you know from your hobby (e.g. computer or software geeks), whatever you have learnt from your office or anything that you are interested in.

Thus, making yourself familiar with the industry results should be one of the top necessary conditions for portfolio diversification. It gives you better understanding of how well the company has been doing so far. And most importantly, what will be its future in years to come. If you are confident with the stocks future profits and cash flow, it becomes less risky for your money to grow.

How Much Money You Have

Obviously, the more money you have the better. Unfortunately, not many of us have the same fund as Warren Buffet does, unless you have inherited millions of dollars from your wealthy parents. Even if you do, the money is still not enough. I'll let you know why.

What makes Warren Buffet's investment so different than many of us is that, once he discovered great stocks offered at discounted price, he will buy not only millions but billions of dollars. His stock purchase alone is sufficient to make the stock prices moves significantly that time.

With that kind of investment, he has enough votes to influence the company's direction. For example, his holding company, Berkshire Hathaway, owns more than 15 per cent of all the outstanding shares of Coca Cola. As the matter of fact, he has been sitting on the company's board for at least 17 years.

You tell me who else have the luxury of sitting in the board of management.

Therefore, just because concentric diversification has worked well for Warren Buffet, it is not necessarily worked well for you; unless you have billions of dollars investing in such companies though. Therefore, as much as possible, allocate huge (if not most) of your asset into something that you have the most control. This can either be your real properties investment or starting up your own businesses.