This is in continution of the learnings from my own investement journey and hopefully it will be valuable.
When i started investing i used to have lot more diverse portfolio compare to now which i have. Here are couple of challenges with that approach
- Investing in each company takes time so the more companies you invest in the more you have to spend time.
- When one or two picks of your works you are not making enough profits to make it worthwile. As profits are shared across multiple companies.
Lets do some maths, lets say you have $10K to invest and you have invested in 10 good companies.
Now assuming that company 1 to 5 grow by 20% and 5–10 grows by 40%
Your total return would be 1k + 2k = 3k or 30%.
Now while your research you found 2 companies with a higher potential and you put 4K in each and remaining 2K in others.
So your return on 8K is 3.2K based on 40% growth and 400 based on 20%. So now your total return is 3.6k which is 20% percent more than you original strategy of investing in too many companies.
Even if one of the companies did gave you 40% return then you would be making 1.6k + 1.2k = 2.8k which very close to your original return.
Think about other scenarios when one of the companies which you have investigated explodes in growth and you make 2x to 3x returns.
Also remember finding a good winner might take time and you have to put your effort into finding one. But you have to also make sure that once you have found one you have to make it big on it.
The point is it might take some time to find a company where you are able to make a good decision on its business. And if you have found one go big on it to make it worth.
Remember the amount of effort goes into researching about a company is significant and when you have found one go big into it.
When i started i was invested in lot of companies including Tesla. Slowly i move my funds from other good companies to Tesla and it exploded which made my investments worthwile.
This is only my thought process and you do your own research to find which strategy works for you. If you have any thoughts or comments please let me know.