Dont Put All Your Eggs in One Basket

Heard the phrase “don’t put all your eggs in one basket” but as billionaire hedge fund trader Stan Druckenmiller once said. ”I like to put all my eggs in one basket and really watch the basket.”

So by this he meant that if you spread your attempts to make money too thin then diversification often leads to under-performance.???

I kind of agree with this, I believe get good at something and just keep doing it, no need to reinvent the wheel.

But many gurus preach the opposite, diversification will reduce risk.

Dare to be silly...What if you don't have any eggs??
I like this

Reasons to keep all your eggs in one basket

 

So is the choice scrambled vs boiled/poached?

The theory of hedging is fine provided the growth across all categories exceeds any losses.

 

Uh? I don't have eggs, just wigglies.

And those wigglies move in the same fashion as stocks and commodities.
Though Ed Sykota preferred the term "cockroaches crawling up a wall".

 

what about scrambled eggs

 

Is this an eggcellent question?

If you are making pots of money putting all your eggs in one basket then its a goer, what if the basket breaks?

 

I heard a quote (can't remember who) saying that diversification is to reduce the risk of ignorance.

ie if you are ignorant, then diversification will reduce the risk of a screw up that you could not predict due to ignorance, but if you are well educated in something then diversification just waters down your results.

 

Any Government, either here or O/S.
Be it Local, State or Federal can directly affect anyone's individual investments interests overnight with a change of legislation/taxation/regulation etc.

One basket isn't enough imo.

 

Would it have been a large stakeholder of a company talking to someone about buying shares in same company ?

If it is in regard to property, it would be ignorant to say that I think.

It does potentially give you more exposure to a market that does turn down though. At the same time, apply that too Syd, highly likely if you buy now you may sit for many years with zilch happening.

I guess it depends on what is considered "educated".

 

I have to agree with this to a point also. But you really need to watch your basket..

Over the years when i've identified areas to invest or develop, I've tended to focus hard on that particular area with multiple investments. This has paid off handsomely allowing higher and quicker profits, especially when developing.
EG. in 2010 I found an infill development in SE Melb, which I believed had great potential CG and the figures showed positive cashflow from day 1.
The figures worked and I ended up doing 3 simultaneous builds over 12 months in the area. At the time i figured I would capitalise on this potential rather than go looking for other investment areas.

I've done this multiple times BUT.. You need to become an expert in the area, know exactly where the market is at and what its doing. Do stringent DD and if the figures work, back yourself 100%

 

I can not recall, but I believe it was general market advice and not a product they were pitching.. Can't be 100% sure though since I don't recall the details.

Oh I don't believe it was specific to property investing though. Sorry, should have mentioned that I suppose.

Regarding you comment on Sydney, I think your comment actually is geared towards not diversifying. In this case it would be to not diversify into all markets but rather stick to the markets that a more educated investor would benefit more highly from.

 

I think the point is regardless of asset class, if you get good at a particular strategy and you can continue to turn over profits then this will be far more effective than diversifying.??
I am not saying this is what investors should do, but it may work for some.

On the flip side I diversify into many property markets as I am following a rising trend, but I am not diversifying into share market at the moment because I doubt I could replicate this with shares because I don't have the same knowledge or the interest, passion or the psyche for this.
MTR

 

In the share market makes sense. But you can't renovate or develop a share.

 

What's wrong with that?

 

It all depends on what diversification means to someone. I focus heavily on real estate but I diversify in a few areas across Australia. Then I also focus 2 specific target markets with 1 or 2 specific strategies, but the assets are diversified across a few states and some international.

To me I feel its the right balance, my focus is on real estate and certain markets but my diversification is based on a geographic variable. This allows me to focus and specialise on 1 or 2 strategies and demographics and get good at it while being exposed to a few different markets, cycles, economies so not all my assets are being exposed to the same singular risk factor. I am of the opinion if you put your eggs in too many different markets you will tend to underperform due to perhaps a lower level of risk exposure. But I don't think the risk outweighs the benefits of having a few eggs and strongly developing them.

 

I'm ready for my 2nd investment property and am ready to diversify. I think its even more crucial when starting out to diversify when you yourself dont really know what does or doesnt work.
And then i get people who want to buy in the area that I've boight in asking me why im not buying more and they dont understand.

 

Personally I think if you've bought in an area that your confident with and your DD is telling you there are still great deals around , buying more than one deal would make perfect sense. Be careful not to look in other areas just to 'diversify' if there are still good deals in an area you've already bought in. On many occasions having 3 -5 in an area could be perfectly fine imo.

 

Sure you can. If the price has dropped (for no good reason/ or on market sentiment) you can top up, thereby adding.

Ok less controllable than property, especially in timing,

And I agree with Druckenmiller, fund managers now often have 50-100 companies in their portfolio at 1-2% weighting, meaning any movement of one individual stock makes little difference. Basically they are all creating their own index fund.

Much better to buy a few strong conviction stocks and when you get a big upswing, say like ASX:BIG has recently, then you get to really benefit.

Not for those with a weak stomach, hence the diversification recommendation from advisors. People say they are risk tolerant, until they see numbers turning red.

 

The eggs quote has been attributed to various people, but is likely to have originated with Andrew Carnegie in 1885, and popularised by Mark Twain. Here's the original, from Quote Investigator:

The concerns which fail are those which have scattered their capital, which means that they have scattered their brains also. They have investments in this, or that, or the other, here, there and everywhere. "Don't put all your eggs in one basket" is all wrong. I tell you "put all your eggs in one basket, and then watch that basket." Look round you and take notice; men who do that do not often fail. It is easy to watch and carry the one basket. It is trying to carry too many baskets that breaks most eggs in this country. He who carries three baskets must put one on his head, which is apt to tumble and trip him up. One fault of the American businessman is lack of concentration.

I don't think that diversification is a bad thing if you're a passive investor. A cheap stock market tracker will yield better returns than most fund managers. However, if you're running a business, and I'd include the sort of development that @Leo2413 is doing in that, then focusing on what you're good at makes sense.

 

I guess it comes down to if you can successfully "concentrate" on a wide portfolio or not. Here it will depend on the individual as to what suits their character and skills best.