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Warning! Take Warren Buffett’s Advice on Diversification to Avoid This Major Mistake

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Warren Buffett is widely considered the greatest investor ever, and with his track record of performance, it’s hard to argue otherwise. When Buffett offers advice, you should pay close attention.

When it comes to diversification, most people know it’s one of the most important factors of building a portfolio. Failure to adequately diversify your investments can leave your investments at serious risk of capital loss; however, there is such a thing as over-diversification.

At a certain point, it’s possible to over-diversify your investments when you’re adding companies to your portfolio but are no longer lowering the risk.

While that may seem like a problem, if you continue to find new companies and logically had already invested in the best companies first, the new stocks you are adding must not be as high quality.

This means that instead of lowering your risk, you’re actually only lowering your potential returns.

This logic is similar to Buffett’s thoughts on the matter; he believes that while investors should diversify, they should also stick to a core base of stocks.

If you own a portfolio of 10 of the best stocks on the market and you have additional funds to invest, why would you choose an 11th best stock when you can just add to one or more of your top 10 companies?

For most retail investors, it will be very time-consuming to track a large number of your companies adequately, so keeping your portfolio relatively small and your focus on a core group of the best stocks that you truly believe in will allow you to be better off in the long run anyway and remain aware of how your businesses are performing.

This is of course contingent on is finding the absolute best stocks, such as Suncor Energy Inc (TSX:SU)(NYSE:SU).

Suncor is the ideal energy stock to own in Canada, and in fact it’s such a high-quality stock that Warren Buffett even owns some shares.

It’s the ideal energy stock because it’s the best integrated energy company, and its midstream and downstream operations, that help the company become more profitable and mitigate against commodity exposure.

The integration also allows it to have steadier cash flows than a number of other energy companies, thus lowering its overall break-even prices.

Currently, Suncor’s operations allow it to fund all sustaining costs and the dividend it pays, out at just $45 WTI, so throughout 2019, as oil has averaged closer to $57 WTI, Suncor has been very profitable.”

The stock is a cash flow machine with a vast array of operating regions, allowing the company to be flexible and increase its production in one region or another in order to capture the highest possible profits given the current market environment.

It currently has return on equity north of 10% and has been increasing the dividend each of the last few years, which today yields roughly 4%.

In addition, it’s also been buying back shares, which I think is prudent today, as its stock is undervalued trading at just 13 times earnings, and its production growth is currently limited due to the curtailments and capacity constraints.

Nonetheless, it’s still one of the best companies to own in Canada, and it’s the perfect stock for an investor with a core group of stocks that wants only the best energy company for their exposure to the industry.

It offers great growth potential, but also some of the top stability you can get in the industry: two of the keys to long-term success.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa owns shares of SUNCOR ENERGY INC.

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