The Dose Makes The Poison

Are your fund investments diversified? Or are they diworsified? Here’s the solution

- Dhirendra Kumar

I think it was Charlie Munger who, during a recent Berkshire annual shareholder’s meeting, used the word ‘diworsification’, originally coined by Peter Lynch in his book ‘One Up in Wall Street’. Someone once called Munger the world’s richest stand-up comedian, and I must say that his use of the word incorporates not just wit but a great deal of investing wisdom.

This is what Charlie Munger said, “A lot of people think if they have 100 stocks, they’re investing more professionally than they are if they have four or five. I regard this as insanity. Absolute insanity. I think it’s much easier to find five than it is to find 100. I think the people who argue for all this diversification, by the way, I call it ‘diworsification,’ which I copied from somebody. And I’m way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage.”

While he was talking about stocks, here we are talking about mutual funds, but the principle applies just as well. When people set out to invest ‘properly’, they feel that diversification is the most important thing. This is correct, of course. However, every child has heard the saying, ‘Don’t put all your eggs in one basket’. In the world of investing, this translates to diversification – a concept universally recognised as advantageous by investors. Those investing in mutual funds commonly interpret this as a need to spread their investments across multiple funds instead of sticking to one or two.