In the perfect world it would obviously be great if one had 100 percent of your portfolio invested in the most successful investment available at any particular point in time. Unfortunately, the vast majority of investors stumble from one mediocre investment to the next. The very unfortunate fall prey to a vast array of investment scams - there are plenty of local examples. It is clear that very few investors are both competent and confident enough to become masters of their own financial future.
For the average investor, the world of financial academia has the answer - diversification. They argue that markets are efficient and that it is impossible for one investor to consistently have an edge over another investor. Furthermore, they claim that investors with stellar records are the equivalent of a five-sigma event or, in other words, the likelihood of seeing consecutive blue moons. This is the argument that if you put an infinite number of monkeys in front of an infinite number of typewriters, eventually one of them will purely by chance type out an exact replica of the Bible.
In the real world where, in rampant bear markets, many money managers fail to beat their benchmarks, such scepticism is understandable. You just need to read the financial journals of the past few months to get a clear picture of under-performance.
Of course, to traditional value investors, this is heresy and they object most vehemently to being classified as freaks or flukes. They argue that proper research and value investing is the answer. Many have been very successful and have added great value for themselves and their clients.
So, unless the average investor can identify and then convince a five-sigma portfolio manager to look after his or her account or funds, he or she has no choice but to follow the advice of the Harvard graduates and diversify. Personally, I think they settle for second best. They have given up the battle and the loss is above-average performance. It seems, sadly, that in these times an all-pervading socialistic veil covers most of our lives and it is almost "wrong" to try to achieve an above-average result.
Investors must decide if they are prepared to diversify away the chance of an above-average result or whether they can, after very careful research, put all their eggs in one basket and watch it very carefully. Clearly this needs to be done taking into account the risk profile and investment objectives of each individual client.
There are no free lunches and achieving an above-average investment track record takes plenty of hard work and is much more difficult than most people realise.
It is understandable, and even appropriate, for some investors to take the diversification route.
Warren Buffett, the world's most successful investor, boasts an enviable and, arguably, unparalleled track record based on fundamental research and focused investing. He has the following to say about diversification: "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing. Owning a single successful business has made many fortunes in the world."
A host of wealthy family names spring to mind - Rothschild (Battle of Waterloo), Oppenheimers (gold and diamonds), Getty (oil), Henry Ford (motor cars), and Rockefeller (oil). And Buffett goes on to say: "If you understand the business, you don't need to own very many of them. If you have a harem of 40 women, you never get to know any of them very well."
Deciding on whether or not you should go the diversification or focused investing route is most difficult, so let me end with an enigmatic quote from Will Rogers, the star of early Westerns: "Don't gamble, take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."