De-worse-ification

How Does the Smart Money Look at Diversification? Many Believe Broad Diversification Creates Safety How Does the Smart Money Look at Diversification?

Flaws In Broad Diversification “De-worse-ification: to describe an investment approach where people spread themselves too thin and do not concentrate on the best opportunities available.” What is normal? Is there a new normal? - Peter Lynch- Research Consultant and acclaimed Fidelity Investments Magellan Fund manager from 1977-1990 3

Flaws In Broad Diversification “If you can buy more of your best idea, why put [the money] into your 10th best idea or 20th best idea? . . . The more positions you have, the more average you are.” - Bruce Berkowitz Founder and Managing Member of Fairholme Capital Management and a Director of Fairholme Funds, Inc. 4

“The Best” Investor View “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing… Wide diversification is only required when investors do not understand what they are doing.” Have you been working with an advisor where there strategy is Buy and Hope? Is your advisor trying to convince you if you just keep hoping everything will turn out okay? How many of you believe that? -Warren Buffet Chief Executive of Berkshire Hathaway (1966 annual report) 5

“The Best” Investor View "Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count … Good [investment] ideas should not be diversified away into meaningless oblivion." Have you been working with an advisor where there strategy is Buy and Hope? Is your advisor trying to convince you if you just keep hoping everything will turn out okay? How many of you believe that? -William H. Gross “Bill Gross On Investing” (1998) 6

Other Views of Diversification “You’ll need at least a dozen carefully selected individual stocks to be truly diversified.” - Beginner’s Guide to Asset Allocation, Diversification, and Rebalancing (www.sec.gov) 7

Too Many Holdings? “The Wall Street Journal reports that the average stock fund has 172 holdings.  What is the point of having that many holdings?” Here’s what we’ve learned about over diversification. According to an article written in 1987, “there is very little incremental reduction in annual standard deviation once you get past about 20 holdings.” Source: How Many Stocks is too many? Diversification, John Reese, The Guru Investor, Validea, August 19, 2009 8

What’s the right number?

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