Treat your portfolio like your inner circle.
I’m sure you’ve all heard it’s better to have a few quarters then a bunch of nickels and dimes when it comes to your friends. Well, I think the exact some principle is worth following when selecting a company to join your portfolio. It is much better to have three to six outstanding companies that you can understand and evaluate than twenty to thirty companies you have a general idea about.
Looking back over the last twenty years most people can only name a few companies they wish they had bought. And for most people, the same businesses are mentioned in their answer.
Let’s say you have a solid group of friends. Three or four people who make you laugh, inspire you, and are doing the best they can in their own life to achieve success and happiness. But then you bring in a bad apple. Someone who encourages laziness, victimhood, and is emotionally unstable. Regardless of how great the other friends are, this person will begin to weigh on you. Maybe you won’t see your other friends as much, or you’ll pick up a bad habit. It will slowly have a negative impact on you. You would have been much better staying with the original small group of friends.
The same is true when considering purchasing shares of a company. Ask yourself, “Will this company bring the average quality of my portfolio up or down?” Ask yourself, “Are you buying it because of its exceptionalism?” Or because some broker told you it’s important to diversify and spread your bets around? Or maybe you had some extra cash lying around, and figured it was worth a shot.
I will save the myth of diversification for another blog, but imagine having 45 friends. How many of those people would you really call a friend?
If you maintain a tight circle of quality people you trust and appreciate, it will most certainly impact your life positively. The same goes for your money. Putting your hard-earned money in the hands of the very highest quality companies you can find, and ignoring all the mediocrity the market will offer is a simple and profitable discipline to follow.