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It is generally accepted that the increase in the number of securities in the portfolio certainly leads to a decrease in the total investment risk. This statement, originated in academia, is built on two important assumptions: investment opportunities must have the same mathematical expectation (range of all possible relative outcomes including negative, taking into account the probability) and not to have cross-correlation (i.e., the movement of some securities should not repeat the movement of others).However, this does not happen in life, and we are forced to work hard to find attractive opportunities for capital investments. Let’s say we have two companies with the same expected return, but one carries a risk of capital loss of 5% (suppose that risk is measured exclusively quantitative indicators, although this is not the case), and the second - 1%. Wider range of expectations of the first company only increases the overall risk portfolio. We prefer to focus on a few companies with high potential growth and near-zero risk of loss invested capital rather than excessive diversification that only reduces profitability and increase the risk. In other words, investment is by no means solving a math exercise. Investment is a gold washing process (it is desirable that the prospector also possessed Picasso's view on everyday things). Another question is where to find gold? If you want to beat the market, you have to look where the other 99% of the market participants do not. We research undercovered stocks from around the world looking for growth, deep value, and distressed companies.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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