A friend of mine, who wants to get into investing, and knows that I am an investor, asked me how she should go about getting started in investing. She asked me what I invest in. I lit up like a Christmas tree in July. Here is my reply in a "blog"-ready form. I don't think investing is a science — more like part art, part science. The art comes in the separating the junk from the treasure. Despite what anyone says, none of us knows if a stock will go up, down, left or right. We can try (and we do try) to be smarter than most. The facts are, however, that we really don't know.
That realization is what drives my investment approach. I know that Phil Fisher and Warren Buffett recommend that you "wait to swing at the perfect pitch." However. I am not built to be overly confident in one or two selections. That just doesn't yield to great sleeping habits. Yes, I am sure of myself; that's why I diversify.
"Investment is most intelligent when it is most businesslike." — Benjamin Graham
What makes a successful business? A diverse portfolio of products and/or services with a focused group of managers. Likewise, if we are to be successful investors we need a diverse portfolio that is full of cheap businesses.
I know a lot of you are thinking, "But Buffet said concentration is better. I want to invest like Warren!" Let me ask, do you think Buffett is a genius? Because I do, and if you think that he is a genius do you consider yourself to be a genius? Again, if you are like me and don't consider yourself to be a genius, why would you try to invest like him? Let that sink in for a second.
I admire Buffett as much as anyone, but I can't in good conscience attempt to invest like him. (In regard to concentration versus diversification)
Buffett is an anomaly in that his judgement of business and people (management) is unparalleled. This gives him a huge edge. He sees intangibles and is able to quantify those intangibles and deduce them down to actionable pieces of information that in turn help him determine value.
In the end, concentration comes down to the ability of the investor to be able to value the business and understand the risks inherent to that business. If you are going to concentrate, you need to be a good security analyst as well as a good business analyst. That is a difficult job, and one that many do not succeed at.
Most of my value investing peers are willing to concentrate on their best ideas but because they don't have the ability to evaluate businesses like Buffett, end up with mediocre results.
I'd rather take my chances with an investing mythology that is based on looking at the quantitative side (with quality undertones).
Walter Schloss laid the blueprint to follow in order to succeed as a "not-genius" investor. Buy cheap, buy a lot and buy with a margin of safety.