Though I’m not so knowledgeable, I will try to share my thoughts on your query and anyone can use the info. as they see fit (or dump it)
Investing, like life, is all a game of probabilities. The idea of diversification is just to balance the risk. We are humans, not GODs and hence will not know with certainty anything ever. ANYTHING EVER!.
So, your premise that I COULD know which company will do well, is itself extremely faulty. But yes, I do have a higher level of confidence on some stocks compared to others and hence the higher allocation there but probability is not certainty as none of us are GODs.
Now, next point that comes up or probably that shall come up, is…just how much diversification is proper diversification and how do we balance between concentration and diversification. Well, therein lies each ones comfort factor and what one considers risky? You may find a 3-stock portfolio extremely risky but it could be like daily breathing to me…usual daily routine. It’s how you see 3-stock portfolio that matters…water filled glass…half empty or half full…Same stuff seen with different perspectives.
For me, 3 stocks making up the whole portfolio is concentrated…sure! For me, any stock taking up more than 20% of portfolio is concentrated. FOR ME!
So even by my standards, my portfolio is super concentrated. And hence, I have thrown in a bit of balance with two less-fiery managements. All the three business managements are talented and hopefully they can deliver the different stuff which I’m expecting out of each of them.
So, to answer your one line question: If you know which of the 3 companies will do well should you not be investing 100% in that company? If you don’t isn’t that a case for diversification?
My answer: no, I do not know which one will do well and hence the risk balancing by investing in three rather than one. Hence diversification. But therein lies the catch. Investing as I said at the start, is exactly like life. It’s not black and white…it could be grey…its not yes and no…it could be maybe…it’s not diversification or concentration…it could be diversification as a subset inside the superset concentration. I could be concentrating first and choosing my best stocks and then putting in two other to throw in a mix of diversification. When I say concentrated portfolio, I give you just the outer view of the superset…there could be subsets and who knows sub-subsets…just balancing the probabilities as much as I can…no certainty in life but only trying my bit to bring the odds in my favor while on the other hand trying not to lose out on the BIG wealth creation which comes from taking risks.
Investing is an art and not a science and hence no one should become so rigid so as to say that if it is this, it can’t be that and if it is that, it can’t be this. So, diversification and concentration can both go hand in hand. We should open our minds, don’t just speak what everyone speaks or don’t just speak what logic tells you…think out of the box…listen to something more than the brain…that’s where investing will start.
As I implied earlier, Investing is like Life. More Art, Less Science, Full of Grey and Bereft of Impossibilities…
If the above words help someone, good. If not, good.