Diversification is a “normalizer”. It spreads your risks and returns out across a wide variety of bets, of which some will win big and others will lose. The more diversified a portfolio, the closer the returns will match that of the market. So, if you want to beat the market, it is far superior of a strategy to focus on a few small bets that you know better than the market (who is mostly diversified). The problem is that this is difficult to do, and why Buffet refers to staying within your “circle of competence”. You will be far more likely to beat the market, by knowing more than them, if you stay within the realm of ideas that you know best and spend your life within, either as a customer or working in the industry.
Connections
Detailed Forecasting Adds Little Value
Link Explanation: This is another example where wall street and finance academia get investing wrong. Getting the market returns is fine and still exponential. Diversification is a great method also for protecting wealth once it is already made. But it is not the best way to invest if your goal is the beat the market.
Accept You Don’t Know The Future And Let That Guide You
Link Explanation: The linked note above is contradictory to this note. It discusses that none of us knows the future, regardless of our experience to date, expertise, or circle of competency. Staying within your circle of competency is just a way to increase the odds of your success, not a guarantee. If we accept humility as our guiding principle, we will likely settle on passive low risk investing, such as through an index.