Diversification or, di-worse-ification

Why would a serious investor who is interested in putting serious time and thought into stock picking diversify (di-worse-ify)? Consider the following.

If you want your portfolio to appreciate by 20% per year, how hard do you think it is to pick a single stock that will appreciate by 20% per year?

Now, how much harder do you think it is to pick, say, 10, 20, 50, or 100 stocks that will EACH appreciate by 20% per year? I'd say that's DAMN HARD, much harder than putting all your efforts into picking just one or two stocks that will appreciate by 20% annually.

Now, if you're going to pick 10 stocks, you can't give each one as much attention as you can give to, say, 2 stocks, so you're probably going to make more mistakes than you would if you picked fewer stocks. That means that in order to get your portfolio to appreciate by 20% annually, you need to be able to pick many stocks that will, on average, appreciate by MORE than 20% in order to make up for the shortfall by your losers. Now that's even harder than picking just one great stock!

But mutual funds do it all the time, diversifiying all day long into 50 or 100 stocks. How can mutual fund managers honestly think that they can do their due diligence on 100 stocks, each of which ought to do better than their target rate of return, when it's hard enough to do it on 1 or 2 stocks? Is it any wonder than the VAST majority of mutual funds far underperform simple market index funds?

Keep it simple, Slick, and focus on what you know, concentrate your efforts on finding the best assets you can find, and hold those assets for long enough to reap huge rewards.