The Advantages of Keeping Your Eggs In One Basket

By Ron | Mar 27, 2008

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Andrew Carnegie was quoted once as saying, “Keep all your eggs in one basket, then take care of that basket.” This flies in the face of the holiest of the financial holy grails: diversification. Jim Cramer even has a segment on his show called, “Am I diversified?” where callers list 5 stocks in their portfolio and Cramer announces his verdict either yes or no.

So why would a man who was the richest the world had ever seen tout a philosophy contrary to general thinking? Why would Warren Buffet have the majority of his holdings in 30 to 35 stocks and not the “broad based index funds” everyone trumpets? He averages 28% return (not the 8% - 12% the S&P has historically returned).

Why? In a word: FOCUS

The business owner who puts all his eggs in one basket isn’t foolish, he’s committed. I’ve seen business owners cash in college savings accounts, cash in life insurance policies, sell almost everything they owned and mortgage their home to the max in order to fund their company. These guys were my partners in business. We made it because of commitment and focus. ALL our eggs were in one basket. I’ve watched others who hedged their bets and had back up plan after back up plan. They didn’t make it. Their plans weren’t what was wrong, it was their commitment.

Most people who sing the praises of “Don’t put your eggs in one basket” don’t have experience of starting a business with limited capital. They just keep saying what the gurus say. Most of those gurus never started a business from scratch.

Investors and new business owners today want to “set it and forget it.” No one wants to be bothered with focus or with educating themselves on business valuation. In my opinion, if you have this attitude and you experience a 40 year return on your broad based mutual fund of zero percent, don’t say you weren’t warned. The stock market has seen long extended runs of flat or even negative returns for the market as a whole, but for those who learned to focus, great wealth was to be had. Everyone wants to say that the “average” return on the S&P has been 12 percent. When was the last time the market returned the exact same amount as its average?

What happens when the Baby Boomers start taking their money out of the market? When they being selling their holdings to fund their lifestyle, I believe you will see a long term decline in the market. As sellers outnumber buyers, the market will tank. Add to this potential problem our current tightening of credit, the declining dollar, a housing market that is struggling to stay afloat, the rise of China and India to compete with the US on all economic fronts, and oil that is through the roof and you have the makings of a long stagnant market return.

Remember, you cannot manage ANYTHING based on averages. Managing by the averages is a recipe for disappointment and disaster. Everything in your life must be managed on the basis of the available knowledge you have at the time. If you say a mutual fund has averaged 11.4 percent over the last 5 years should you think that it will continue? No. Will it continue over the next 10 years? No. The next 20 or 30 years? No. Dollar cost average all you want. It won’t guarantee an average return over any investment horizon. Things change. If your mutual fund is heavily slanted toward the housing industry today, I’d suggest moving to another investment vehicle, perhaps something in the “green” category?

I am not saying to invest all your money in one “hot” stock, that would be stupid. “Taking care of that basket” is beyond your ability. But if you are able to care for your basket, in the form of investments in real estate or a business, there is absolutely nothing wrong with putting all your eggs there.

So, put all your eggs into the one basket you can take care of. You can control how it performs and how it succeeds. I’d much rather watch over my own eggs than have someone else doing it.

Technorati Tags: average, eggs, basket, fund, market

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10 Comments so far

Frugal Dad (53 comments.) March 27, 2008 11:57 am

Ron, I agree wholeheartedly with your recommendations as it seems many have bought too far into the diversification route, spreading themselves so thin they begin to lose track of what they are invested in. There is a lot to be said for a more narrowed approach with established limits on when to ring the register and when to move on.
Remodeling This Life » Weekly Roundup March 30, 2008 5:59 am

[...] The Advantages of Keeping Your Eggs in One Basket at The Wisdom Journal. I love this post so much. I even made hubby read it. It’s really true, for us, and when I think about it many things in life to just focus on one thing and do it really well instead of all this half-hearted spreading around of energy. I guess you could say that our home is our basket at this point in our life. We work hard at it and focus on it and that’ll inevitably bring great things for us. [...]
Four Pillars (22 comments.) March 31, 2008 12:57 pm

I disagree with the general post. Buffet is always used as the “anti-diversification” example because quite frankly he is the poster child for not diversifying.

However - most equity investors don’t have any focus, ie they probably don’t spend much time analyzing their investments so for them I think diversification is better.

As you mention, someone starting a business has to focus and put most if not all their $$ into the business because otherwise there wouldn’t be a business. The same thing could be said of buying a house - I always read how you “shouldn’t” have more than n% of your $$ in your house which is a crock. Unless you are old and stinking rich your house will always have a significant portion of your portfolio.

Mike
Ron March 31, 2008 1:59 pm

@Four Pillars:
Ah, but you do agree with me. Reference your second sentence. Focus. If you can take care of “that basket” it is okay to keep your eggs there. But that’s a big IF. Most people, like you say, are ADHD investors….wait a minute, that sounds like a great post title!

(and if someone isn’t going to learn how to properly value a public company, yes, diversification is better)
Four Pillars (22 comments.) March 31, 2008 2:25 pm

I guess I do agree with you..

One other thing about Buffet - he doesn’t just buy the stocks - he can control the companies as well and get great access to the inner workings of the companies he is interested in.

Mike
Ron March 31, 2008 2:56 pm

@Four Pillars:
He “takes care of that basket” doesn’t he? I think if you’re a stock “trader” you better be invested in a diverse field, but if you’re a real investor, a fundamentals and value kind of investor, you can concentrate on those industries and companies you know and understand without spreading yourself too thin in order to maximize your returns. Buffet has averaged 23%. Now if I could only afford ONE share of Berkshire Hathaway…..
Top Referrers and Some Good Reading April 6, 2008 3:01 am

[...] Wisdom Journal says it’s ok to have all your eggs in one basket. Excellent blog by the [...]
dividenddollar (1 comments.) April 6, 2008 10:29 am

I agree with this kind of thinking. As long as you are willing to do your homework, then putting all your eggs in one basket is the right way to go. Like Four Pillars said though, most people aren’t willing to focus and do the homework necessary. For them, a diversified portfolio of investments would be better.
Ron April 6, 2008 1:14 pm

And you’re exactly right. What gets to me is that the homework isn’t all that difficult! The amount of information that’s available to help you evaluate a company today is staggering. Just 15 years ago, you had to send off for snail mail copies of annual reports, research Value Line at the library, and rely on brokers who did everything in their power (some still do) to get you to think that investing is too difficult for Joe Average.

I’d rather do the homework and end up with my 15-20% average annual returns…
Four Pillars (22 comments.) April 6, 2008 1:48 pm

You guys are making the assumption that all investors believe in active management. I’m a huge believer in passive investing because I truly don’t believe that anyone can outperform the market with individual stocks.

Needless to say, if you are a passive investor then diversification is one of the key strategies.

Mike