From the previous post I did on Investment Risk one might conclude that it’s best to invest all your efforts in one venture, one big potential payoff. But there is risk to having all your eggs in one basket… what happens if the basket drops?
A number of years back I read a good book on investing and in it they covered investment diversity. Basically the premise is that you should find and invest in good companies with solid management teams. Finding these companies requires time and effort. But after finding them, the work doesn’t end there. You need to keep on top of your investments to:
- Ensure that nothing critical is changing for the company or its industry, and
- Your choice remains sound and your expectations for good returns over the long-term has not changed.
Therefore, a well diversified portfolio does not mean hundreds or thousands of stocks, but a maximum of 5-7 strong performers. More than this and two things happen:
- Your overall returns will drop as you make compromises in the name of diversity, and
- You will need to spend all your time investigating and researching or compromise on the quality of stocks (then you are gambling).
This is much the same for an entrepreneur or a company. When you are starting up it is a good idea to focus all your efforts on one thing and a few customers.
Over time you probably want to diversify to mitigate the risk. This means not relying on just one or a few customers, not relying on a few good employees and not selling into a single market segment.
But heading off in too many directions at the same time will likely dilute your effort (focus) and ultimately your returns. A few high quality, well managed ventures is far more rewarding and less risky than only one or too many.
And if your primary venture needs or deserves everything you have because it’s a runaway superstar… diversify in other ways. The world is fickle and things change fast.
