Market gurus like Jim Cramer preach the benefits of broad diversification, something I think is good for investors too: whether your goal is to produce returns approximately equal to the market averages. In other words, whether you believe in diversification, buy an index fund. whether you don’t want to simply buy and hold index funds, broad diversification is unlikely to construct sense for you.

I recently found a good summary of why combining diversification with stock-picking is a not good view from an unlikely source: Michael Konik’s The Smart Money, a book about an elite sports bettor who gambles hundreds of thousands a day on football — and wins. Here, he explains why the elite gamblers don’t bet on more than a few games each week:

I’m sober abundant about the difficulty

of betting sports to realize that gambling on seven pro games in one weekend is the sign of a sucker. The linemakers just don’t construct that many mistakes on NFL football, where all the knowledge is widely known to everyone in the universe.

It would be impossible to sum up the problem with diversification in the stock market any better. Generating greater returns without taking greater risk requires the investor to spot instances of market inefficiency — the stock market equivalent of the linemakers making a mistake. And even the best investors in the world can’t find abundant market inefficiency to earn exceptional returns while owning a lot of stocks.

Original post by Zac Bissonnette

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