The Diworseification Trap
In the world of investing, there is a very dangerous word called Diversification. Most people think it means “Buy everything and you will be safe.” They buy fifty different stocks and think they are clever. They have forgotten to Invest in What You Know.
They are not clever. They have Diworseified. They own a smattering of every animal in the Six Categories of Stocks, but they don’t understand the heart of any of them.
Peter Lynch, a man who liked to know the names of the people who ran the companies he owned, realized that if you own fifty stocks, you have no idea what is happening in any of them. You are a man who has fifty children and can’t remember their names.
The Problem with More
- The Lack of Focus: If you have fifty stocks, you can’t possibly keep up with the story. You are a man who has fifty jobs.
- The Mediocrity: If you own everything, you will get the average. If you want the average, buy an index fund and go to the beach.
- The Human Edge: You only need a few great companies to become rich. One tenbagger is better than fifty stalwart stocks.
If you find five great companies that you actually understand, and you own them for ten years, you have a better chance than if you own everything in the world.
The Smartin Score: VOO
An index fund like VOO is great for people who don’t want to think. But if you want to beat the machine, you have to be selective.
- Smartin Roast: If we ran the Smartin App on an index fund, it would tell you that you are buying both the gold and the garbage. The PEG ratio is a mess because you are owning the winners and the losers.
Be selective. Don’t diworseify.
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