Photo: Flickr / Sreejith K
Diversification seems to be the modern investor’s mantra, so when an investment advisor told us that it isn’t for everyone, our ears perked up. According to Amir Avitzur, author of Why Do We Sell Low and Buy High?, there are better ways to go about hedging against risk than investing in companies you don’t know.
“It’s not that I’m against diversification from the point of view that you don’t want to put all your money in one company,” Avitzur told Business Insider, “I believe the great investor, Mr. Phillip Fisher, summarizes it perfectly in his book, Common Stocks and Uncommon Profits: ‘Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know, and far too much in others about which they know nothing at all.'”
In his mind, “investors need to base their buy and sell investment decisions on the company worth (or intrinsic value, acquiring knowledge about the worth of the business, its people and its financials prior to any investment decision).
“When a person knows the approximate intrinsic value of the company, then the investor can decide to buy shares. The investment decision can then be made to either buy shares of the business at significant discount to its intrinsic value—or sell the business when the market offers to buy your business shares at a significant excess of its intrinsic value.
“An investor does not need to diversify into hundreds of companies that they know very little about. Instead a knowledgeable investor can concentrate his investments with companies that he has a great degree of knowledge about,” Avitzur continued.
“If you do not have the time, the will or the inclination, go with Jack Bogle’s suggestion – just dollar cost average into an index fund. You will still beat most of professional money managers and sleep well.”
UPDATE: We have updated some of the quotes in this post to more clearly reflect what Mr. Avitzur now says he was trying to say during our original interview.