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Investing and business books are complicated. Picture doodles are not.
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DIVERSIFICATION IS PROTECTION AGAINST IGNORANCE

When an investor lacks knowledge and understanding about a business, it is prudent to diversify risk. This is like choosing among three opaque mystery boxes - you do not know which box has a diamond, and which has coal. It would be ideal to spread an investment over all three boxes.





When you fully understand a business, you can already see if the box contains coal or diamonds. In this case, it may make less sense to diversify - you do not require as much protection against ignorance. This approach is considered focus investing.





Investing typically occurs between the two extremes, as the investor lacks full knowledge or understanding.






CIRCLE OF COMPETENCE & AVOIDING LOSS

To avoid making big mistakes, an investor has to realistically define what they do not know or understand - items which are outside of their circle of competence. Instead, the investor can focus on doing a few things right which are within their circle. An investor is exposed to risk and unknowns by overstretching beyond their ability to understand the investment.






THE IMPACT OF TIME AND CHANGE

Time is the friend of the wonderful business, the enemy of the mediocre. Some businesses require continual investment over time to stay competitive and maintain market share, such as auto companies.





Others, like toll bridges, may not require continual investment to maintain market share, and may even improve as a business over time as traffic increases.