The Importance of Diversification in Risk Management There’s More Than One Form of Active Portfolio Management

Keeping Enough Ideas to Counteract Bad Outcomes

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We want to have enough good ideas at work that if we’re wrong or unlucky on one or two, we haven’t lost a significant amount of capital. It’s not unusual for us to make a good decision that has a bad outcome – this is a probabilistic business. If you’re really concentrated and have two bad outcomes out of ten perfectly good decisions, 10% of your portfolio can blow up. I’ve heard the argument that if you have your top ten best investments, why would you want to dilute it with your 11th best investment? But if I had to order my top ten ideas by how much I thought they’d go up, I guarantee you that wouldn’t end up being the top ten in actual performance. So we’re just more comfortable being somewhat more diversified.
Source: http://www.valueinvestorinsight.com/