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What's focus investing?

Focus investing means concentrating your money in the stocks of maybe five or 10 companies. And a greater share of your money is invested in the companies you've judged to have the very best prospects.

You own a few companies that you've taken the time to really understand, instead of many ycompanies with little information on each one. This is unlike the more common broad diversification strategy, in which you invest similar amounts in a large number of companies. Concentration of your money in few investments tends to encourage a disciplined research approach, since the consequences of poor research can be substantial losses. Your goal is to find well managed, financially sound businesses whose value is not fully reflected in their share prices. These companies have a long history of above-average returns and stable management. This stability predicts a high probability of continuing to do well. You need to look at other factors, too -- including long-term prospects of the company. The key to focus investing is finding outstanding businesses that are likely to generate above-average returns over the long term, buy them when they're cheap, and hang onto them for an average of 10 years. If a better stock comes along, you buy it and sell one of your other stocks. Your aim is to have a low turnover in your portfolio. It's a buy-and-hold strategy. People like U.S. investment guru Warren Buffett have popularized focus investing. It's based on the principle that your return as a shareholder is ultimately determined by the economics of the businesses you own. Share prices go up and down in the short term, but eventually reflect what the business is worth. Focus investing requires the willingness to keep your stocks - assuming they still have above average prospects -- through any short-term ups and downs in share prices. You're more likely to hang on to good companies if you have confidence in your picks - confidence that comes from having done your homework on these companies. Superior businesses bought at a significant discount to their inherent value will ultimately see their true worth reflected in a higher market price, focus investors argue. This will produce above-average returns. This strategy may offer potentially higher returns than you might receive with a diversified portfolio but the risk of losses can also be greater. The value of your holdings will likely be more volatile, too. Focus investors tend to not pay much attention to the day-to-day changes in stock prices. In fact, they may use price dips as buying opportunities. There's no guarantee this or any other strategy will pay off, of course. Investing is not an exact science.