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For those of us who have read books about Warren Buffett, we would also remember something along the line that diversification is for the "know nothing" investor and for the "know something" investor Warren Buffett, when he identifies something good, he goes in big!
He doesn't diversify, he concentrates!
Of course, this is probably viable for us if we were in the same league as Warren Buffett and, of course, if we were in the same league as him, I wouldn't be blogging here and you won't be reading my blog.
Maybe, there should be at least two more categories of investors: the "know a bit more" investors and the "know a bit more than a bit" investors.
I started out as a "know nothing" investor in my university days and would buy anything analysts recommended.
Chasing after the flavor of the month was a regular exercise. I would be very happy if I made money and would be very sad if I lost.
I had no technique to speak of and did not employ FA or TA. I did diversify since I must have had more than twenty different stocks in my portfolio at any one time.
Did that help to reduce risk? I think not.
I was constantly worried about whether my stocks would make or lose money. I didn't know what they were doing most of the time. I would jump at the slightest noise. Now, I'm sure just reading this short paragraph has stressed you out.
A couple of years after graduating from university, I did a diploma in business administration.
One of the things I had to learn was financial accounting and that started me on FA. I became a "know a bit more" investor.
My portfolio was still very diversified and it had many counters brought forward from my "know nothing" days.
It was really time consuming to go through every stock and much of my FA was half baked.
I then read somewhere that if we had more than 10 counters in our portfolio, that's too many. That made sense.
I tried to rationalise and drop some counters which were non-performers or loss makers. I tried to concentrate more of my resources in blue chips: ST Engineering, SPH and SFI are some that I do remember.
I also loaded up big time on Capitaland at one stage but sold way too early because a friend painted a vivid picture of how the property market would not do well then.
Lesson to take away from this: if you had done your FA well, hold with conviction and if you were not able to do this, hedge by halving your exposure, not abandon the entire position.
I decided that I was "kiasu" but I was also "kiasi". So, strong dividend payouts became a big plus for me.
I went in big time on REITs and other forms of trusts for the same reason, attracted by the high yields.
I also lost big time because of REITs and other forms of trusts in this recent financial meltdown.
Lesson to take away from this: if someone just talks about high yields and big discounts to NAV without ever mentioning gearing, make it a point to question him or find out for yourself.
The immediate past financial crisis was in many ways the turning point of my life as a stock market investor. Burnt badly, I decided to beef up my FA and to learn TA.
I became a "know a bit more than a bit" investor. What this means is that I became a bit more rigorous in my FA, depending on myself more than ever compared to listening to other people, and started using TA to find fair entry and exit points.
I decided to extract the bad investments made in the past and put them in a frozen portfolio as a constant reminder of what I did wrong as well as the type of people I should be wary of.
I have another portfolio of good investments from the time before the crisis and a portfolio of new investments.
I am still as "kiasi" as ever and still want to generate a reliable passive income stream from the stock market with less risk.
I would be very happy once I am able to achieve a passive income stream of 100k a year from the stock market.
Being "kiasu" as well, I want to grow my wealth more rapidly and in my portfolio of new investments, I am actively trading stocks of only three counters and, yes, you guessed it, they are Golden Agriculture, Healthway Medical and Saizen REIT. Well, I guess I am trading more the former two.
I have been accumulating units in Saizen REIT and have not sold any yet as I believe that it is still too cheap.
For the first time in years, I am spending less time monitoring my invesments. I do not have to actively monitor more than the usual three stocks on a daily basis.
Any time I spend doing FA, most of it is devoted to these three stocks and that gives me enough confidence to put much of my cash in them and because I put much of my cash in them, I am more careful in monitoring them. It's a loop!
I am not suggesting that you follow my style. I am just sharing with you what has worked for me and what has not.
For sure, I am far from being a "know something" investor like Warren Buffett.
I do not think I will ever move on from being a "know a bit more than a bit" investor but this is enough for me, for now.
Related posts:
1. Grow your wealth.
2. Rationale for divestment.
3. Monitoring our stocks.
4. 101 investment choices.
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