Why did Graham emphasize portfolio diversification?

Okay, no problem. Let's talk about this topic in plain language.

Why Did Graham Emphasize Portfolio Diversification? Simply Put: To "Survive"

Hey buddy! To get into this, we gotta understand one thing first: Benjamin Graham, the "Dean of Wall Street," Buffett's teacher, the core of his investment philosophy isn't about teaching you how to get rich overnight. It's about how to survive in the market first, how to avoid big losses.

All his methods, including the famous "margin of safety," revolve around this core idea. And diversification (or "spreading your bets") is one of the key tools to protect you from major losses.

Think of it like the old saying: don't put all your eggs in one basket. It might sound cliché, but Graham, with a lifetime of experience, tells you this is an iron law in investing.

Specifically, he advocated diversification mainly for these reasons:

1. Guarding Against the "Black Swan," Admitting You're Not God

What's a "Black Swan"? Those utterly unexpected disasters.
Example: Maybe you spent months researching a company. Its financials, management, products all seem perfect. You think its future is bright, so you invest most of your savings. Then what?
- Suddenly, the company faces a huge accounting scandal.
- Suddenly, a new technology emerges, making the company's products obsolete overnight.
- Suddenly, a policy change devastates the entire industry.

No matter how smart or hardworking you are, you cannot foresee these things 100%. Graham himself lived through the 1929 Great Depression. He knew the market's cruelty and unpredictability deeply. So he tells you: "Pal, you're not God. You will be wrong sometimes."

Diversification is like buying yourself "insurance against being wrong." Even if one of your "eggs" (stocks) cracks, because you've got a bunch in other baskets, your overall loss is manageable. You won't get wiped out.

2. To Make the "Margin of Safety" Meal More Secure

Graham's core concept is "margin of safety." Simply put, it's paying fifty cents for something worth one dollar. Sounds safe, right?

But the problem is, that "$1 value" is only your estimate. It can change. If your estimate is wrong, or if the market stays irrational, that thing you thought was worth $1 might end up worth only 30 cents. Then, your "margin of safety" didn't protect you.

How to fix this?

Bring in the math of probability!

If you only buy one stock with a "margin of safety," you might just pick the one "bad apple." But if you buy 20-30 stocks all possessing a genuine "margin of safety," it's a totally different story.

Maybe a few specific ones, you genuinely misjudged, and you lose money on them.
But for the vast majority, since you bought them cheaply in the first place, they are highly likely to eventually regain their true value, letting you profit.

This is like building a ship with multiple watertight compartments. If one compartment (one stock) leaks, it's okay. The other compartments remain intact. The whole ship (your portfolio) stays afloat. This is the double insurance that diversification provides for the "margin of safety" strategy.

3. Helping You Hold On, Avoiding Emotional Decisions

This is psychological, but absolutely crucial.

Scenario One: You put all your money into one stock. It drops 30%. Your portfolio looks gruesome. You're losing sleep, can't eat from anxiety. You're highly likely to sell out in extreme panic, at the lowest point, locking in a permanent loss.
Scenario Two: You spread your money across 20 stocks. One drops 30%, but the others are up and down. Your whole portfolio might only be down 1.5%. How do you feel? "Oh, okay, pretty minor while. No big deal." You'll be calmer, more patient, better able to hold and wait for its value to recover.

Diversification smooths out the bumps in your investment journey. It makes your mindset more peaceful, helping you truly stick to long-term investing instead of getting scared off by short-term noise.

How Diversified Did Graham Recommend?

In The Intelligent Investor, his advice for defensive investors was to hold 10 to 30 different stocks.

Less than 10: Too concentrated, doesn't achieve diversification.
More than 30: You probably don't have the energy to research every company deeply, and your returns will likely just mimic the market average, losing the potential advantage of stock selection.

To Sum Up

In Graham's view, diversification is not an optional extra, it's fundamental investment discipline. It won't necessarily make you the most money, but it drastically increases your chances of avoiding crippling losses.

It's a wisdom born of humility, acknowledging our inability to predict the future. It is a powerful risk control tool, protecting your capital. It’s also an emotional cushion, allowing you to sleep soundly amidst the market's uncertainty. This is one of the most valuable legacies this investment giant left for the average investor.