Would you put all your eggs in one basket?

[craft]

The OP was ruminating on diversification!

This is real tough question I reckon.

Asset allocation theory is lost on me. I’m happy to only have equities and a default position of cash (near cash equivalents). I would hold other assets if I found they provided better returns, but maybe through a lack of research and understanding on my part I haven’t yet found better returns in other asset classes over the long run.

As for diversification within equities.

I have set myself some rules.

When Fully Invested I have a minimum of 12 Companies and a maximum of 18. These numbers drive how much capital I allocate to each business – the market will dictate the mark to market diversification which I step in to cap at a max of 25% for any one company.

The minimum number of holdings is there as a protection against unknowns and because I am a minority holder with no control over management. The maximum number of holdings is to force focus. The 25% M2M cap is there for my psychological comfort.

These rules are the balancing act between knowledge/comfort/ambition. I seem to think about these rules more than nearly any other aspect of my plan and bedding down a definitive answer has always alluded me.

 

[Klogg]

When Fully Invested I have a minimum of 12 Companies and a maximum of 18.

Do you ever find yourself buying or searching for additional opportunities that may not be of the same quality just to hit the 12 company minimum that you've set?

Those rules do sound reasonable though.

 

[Julia]

... deliberately missing the point?!

Why? It's a fundamental question for any investor and to ignore it is to devalue any discussion.

 

[craft]

Do you ever find yourself buying or searching for additional opportunities that may not be of the same quality just to hit the 12 company minimum that you've set?

I don’t have trouble finding enough quality companies. It is a fact that the probabilities of a higher return come from the first pick then the 12th. But the key word here is probabilities. The future is unknown the outcomes therefore must be uncertain – I am happy to take the risk control over trying to shoot the lights out. I have experienced to much of my own bias applying analysis, continually see lack of clarity in publically available information and seen too much fat tail stuff to chance being lucky when I don’t have too.

 

[burglar]

... I am happy to take the risk control over trying to shoot the lights out. I have experienced to much of my own bias applying analysis, continually see lack of clarity in publically available information and seen too much fat tail stuff to chance being lucky when I don’t have too.

Perhaps you care to elaborate on the "fat tail stuff".

 

[Klogg]

A short description here:
http://www.investopedia.com/terms/t/tailrisk.asp#axzz29LRFKXve

And more details on wikipedia:
http://en.wikipedia.org/wiki/Fat-tailed_distribution

I'd attempt to explain it, but others will most likely do it better.

 

[burglar]

... I'd attempt to explain it, but others will most likely do it better.

So, more risk in the world than we were previously led to believe!

Ok! So now we need to be more risk averse.

Unfortunately, risk and reward are related!

 

[Klogg]

Unfortunately, risk and reward are related!

Only to a point... More risk doesn't always equal more reward in some circumstances.

 

[craft]

Perhaps you care to elaborate on the "fat tail stuff".

The future seems to accomplish the improbable more often than history would suggest. Just because something hasn’t happened or seems unlikely based on history – it’s not worth betting your financial life on it not happening down the track.