My Changing Views on Diversification
My views on diversification have changed over the years as I become a better investor.
Most investors think of diversification as investing in several companies, for example, investing in the S&P 500 $SPX500 means owning 500 different companies. But if these stocks move together, you are not diversified.
Proper diversification is to have assets with low correlation with each other. For example, you can invest in stocks, bonds, gold $GOLD . Once again, we have a problem. Right now investing in bonds is not such a good idea. Cash is trash. And this works well for macro investors and not value investors.
How do we diversify then? By investing in companies that are undervalued, companies in your circle of competence. You will see that most companies the market doesn't like have a low correlation with it. Besides, you can also invest in special situation stocks.
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