t might be one of the most controversial statements I've ever made. You aren't likely to hear anyone else say it, as it goes against one of investors' longest-held beliefs.
I think diversification actually hurts your returns.
I'm not saying you should have a portfolio of just two or three holdings. But at the same time, I'm not at all concerned with having a portfolio of dozens of holdings that represent every sector of the market.
After all, it's impossible to outperform the market if your portfolio is the market.
Instead, I think investors should focus exclusively on their very best ideas. The ideal way to do that is to own a basket of no more than 20 or 30 of the world's greatest businesses. I only say that many because I don't think individual investors should put more than 5% of their money in one stock.
Still, those 20 to 30 companies should be the best companies you can buy.
And I'm not alone in thinking this way...
Consider that Warren Buffett's Berkshire Hathaway's (NYSE: BRK-B) top five holdings make up 75% of his company's portfolio.
"If it's your game, diversification doesn't make sense. It's crazy to put money into your 20th choice rather than your 1st choice. It's the 'LeBron James' analogy. If you have basketball phenom LeBron James on your team, don't take him out of the game just to make room for someone else."
- Warren Buffett
Of course, you know how successful Warren Buffett has been in beating the market. But he's not alone...
For instance, I've found something I call the "WGB Retirement Fund." It consists of only 12 stocks, but it's beaten the market for the past 1, 3, and 5-year periods... and has nearly tripled the S&P over the past decade. (Haven't heard of the "WGB Retirement Fund"? You can visit this link to learn more.)
Of course, all of this begs the question. If you're going to invest in only a handful of stocks... which ones should you buy?