Go deep but never too deep (The Financial Athlete #50)

One of my life’s cherished memories is diving 80 feet below the surface in a Hawaiian coral reef teaming with a rainbow of colors in tropical fish. This dive was my reward for getting certified by PADI with practice in the frigid waters (I hate cold!) of Monterey Bay in California. In this same trip to Hawaii, I went snorkeling too, but this experience was no where near as dramatic as the diving expedition in the reef, where I felt immersed in another planet.

With investing I also like to go deeper than the shallow waters but not too deep. I concentrate my portfolio with a carefully chosen 10 to 20 stocks rather than cast a wider net and diversify with dozens or hundreds of stocks. For me, wide diversification is like snorkeling, only a step better than the passive experience of watching fish on TV. Snorkeling may be a bit safer than diving, but far less satisfying. Going deep enhances my learning. I get involved with the companies I invest in, calling Investor Relations and Management of small to mid size corporations, following the industry and company news and SEC filings, and discussing the company performance with other investors. No one has the time to do this deeply for hundreds of companies.

While I like to invest deeply, I’ve learned to be cautious to not invest too deeply with more than 20% of my portfolio in any single equity. Investing too deeply in a single investment is like diving too deep in water. Pressure doubles for each 33 feet under water. If a diver dives too deep he will implode. The same can happen to your portfolio if it’s too concentrated.

(Photo above: Professional diver Mehgan Heaney-Grier dives to her first 155-foot record. Do not try this at your home port or any other body of water.)

Tags: concentration vs. diversification, investing, portfolio