The Wall Street Myth that Mugged You-Diversification

The Wall Street Myth that Mugged You, beat you up and left you lying in a back alley.


You fell for the old “Hey you must be diversified” Rule. It sounds good on paper doesn’t it?

Look at your brokerage statement for the last 90 days. Does just looking at it make you sick?

Do something about it. Start thinking for yourself and stop being brainwashed by the financial media and power brokers. If you have read this far maybe you want to do something to change. Read on and then subscribe to get StockSpotify’s 12 Trades per Year.

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Mr.Buffet has often said that the average investor should practice diversification by investing in index funds. Sounds good if you want to be average right?  Investing in an S&P 500 index fund and using a dollar-cost averaging strategy is a great way to make money in the stock market over the long-run. It’s well documented. This is the “dumb money’s” way to grind out 6%-9% if you are lucky.


Warren Buffett sings a very different song for investors who want to beat the average stock market return.

Buffet does not believe an investor who wants to generate an above-market return should diversify. Here are some of his quotes on this subject:

Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.

Wide diversification is only required when investors do not understand what they are doing.

Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it on a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.

You would be better off if… you got a punch card with 20 punches on it. And every financial decision you made you used up a punch. You’d get very rich, because you’d think through very hard each one. I mean if you went to a cocktail party and somebody talked about a company and they didn’t even understand what they did or couldn’t pronounce the name but they made some money last week in another one like it, you wouldn’t buy it if you only had 20 punches on that card.

Buffet says “There’s a temptation to dabble – particularly during bull markets – and in stocks it’s so easy. It’s easier now than ever because you can do it online. You know you just click it in and maybe it goes up a point and you get excited about that and you buy another one the next day and so on. You can’t make any money over time doing that”.

But if you had a punch card with only 20 punches, and you weren’t going to get another one the rest of your life, you would think a long time before every investment decision – and you would make good ones and you’d make big ones. And you probably wouldn’t even use all 20 punches in your lifetime. But you wouldn’t need to.


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