Warren Buffet's low diversification strategy good for small and average investors?

Warren Buffet is a great man and I am a big of him and his investment principles. He puts in lots of wisdom in those few words. However there is one principle of his that I do not fully agree with, or, at the least think is not good for small investors and for starters to follow. That's his "low diversification" strategy!

He espouses the virtue of concentration, rather than diversification, for beating the markets. This is valid but to do that the guy needs to be knowing exactly what he is doing and he needs to have lots of common sense and lots of financial acumen. But how many guys have it? 20%? maybe if you apply the 80:20 principle. That's why I think, and I experienced it first hand as well, diversification is the most important aspect that a guy, who has just started on his investing journey, and small investors, who put in their hard earned money, should follow.

For this category of investors I believe avoiding big losses and disappointments is the key and the only way to do this is through diversification - spreading your money across 30-40 stocks for e.g.. Of course one cannot achieve market beating results with this kind of diversification but one can at least limit downside on their investments. This can be the base that one can build on as they spend few years on the market and pick up the nuances of stock picking. Of course this means that one should spend the time and effort in trying to learn and gain knowledge. If the time and interest is not there then it is better to outsource your money management to a mutual fund manager.

I started investing at the end of 2007, right at the peak of the Indian markets. And I did the mistake of putting in too much money on too few stocks and too quickly. I did them by following analyst's recommendations and by following the technical charts. The result of it is that when the markets crashed my investments were down more than twice the index drop.

I have been trying to learn more about the markets and about stock picking since then. And I am also open to following different strategies to see which works for me and which I am comfortable with. Diversification and periodic investments(weekly) of smaller amounts is something that I am following now and it seems to be working for me - either because it really works or because the markets have been doing well of late. But it certainly does give me time to analyze each of these companies, that I like, in more detail without missing the upside and also limiting the downside.

RK

Warren Buffet mistakes in 2008