======Single-Stock Risk======
Single-Stock Risk (also known as //[[unsystematic risk]]// or //specific risk//) is the classic danger of putting all your investment eggs in one basket. It’s the risk that your investment could plummet in value due to problems at a single company, regardless of how the overall stock market is doing. Think of it as the financial equivalent of a lightning strike; it hits one spot with devastating force but leaves the surrounding area untouched. This risk stems from company-specific events like a major product recall, an accounting scandal, the loss of a key executive, or a disruptive new competitor entering the scene. A prime example is when a pharmaceutical company's blockbuster drug fails its final clinical trial—the company's stock may tank, even on a day when the broader market is soaring. The good news? This is the one type of investment risk you have significant control over. Unlike a market-wide crash that drags nearly everyone down, single-stock risk can be dramatically reduced, or even nearly eliminated, through a simple and powerful strategy.
===== The Perils of Putting All Your Eggs in One Basket =====
Imagine it's the year 2000. You've invested your entire retirement fund in a seemingly unstoppable energy company called Enron. The stock is a Wall Street darling, and you feel like a genius. Fast forward a little over a year, and the company is bankrupt, and your nest egg has vanished. This wasn't because the entire US economy collapsed; it was because of fraud and mismanagement //specific to Enron//. Your neighbor, who had spread their money across 20 different companies in various industries, felt the sting of the dot-com bubble but lived to invest another day. Your portfolio, however, was wiped out. This is single-stock risk in its most brutal form. It’s a reminder that even companies that look invincible can have hidden flaws. Relying on one company for your financial future is not investing; it’s a high-stakes gamble.
===== Taming the Beast: Diversification to the Rescue =====
The most effective weapon against single-stock risk is a concept so simple it's almost beautiful: [[diversification]]. In plain English, don't put all your eggs in one basket. By spreading your money across a variety of different stocks, you ensure that a disaster at one company doesn't sink your entire portfolio. If one of your stocks goes to zero (and it can happen!), it's a painful loss but not a catastrophic one, as your other 15 or 20 investments can help cushion the blow.
==== How Many Stocks Are Enough? ====
This is the million-dollar question for many investors. While there's no magic number, most financial literature suggests that owning 15 to 20 stocks across different, unrelated industries can eliminate most of the idiosyncratic risk.
  * **The Academic View:** Spreading your investment across this number of stocks helps ensure that one company’s misfortune is just a small blip in your overall portfolio performance.
  * **The Expert's Exception:** You might hear that legendary investors like [[Warren Buffett]] advocate for a concentrated portfolio of just a few companies they know inside and out. This is called "focus investing." But be warned: this is an expert-level strategy. Buffett and his team spend their entire lives analyzing businesses. For the average investor without those resources and expertise, diversification is the far safer and more prudent path.
===== Single-Stock Risk vs. Market Risk =====
It's crucial to understand that diversification tames one beast, but not all of them. Investment risk can be split into two main categories.
==== Single-Stock Risk (Unsystematic Risk) ====
This is the risk we've been discussing. It’s unique to a company or industry and can be managed.
  * **Examples:** A new technology makes a company's product obsolete, a factory burns down, a CEO is caught in a scandal.
  * **Cure:** Diversification.
==== Market Risk (Systematic Risk) ====
This is the risk that affects the //entire// market or a large segment of it. You can't escape this risk through diversification. When the whole tide goes out, all boats are lowered.
  * **Examples:** A global [[recession]], a sudden spike in [[interest rates]], a major geopolitical war.
  * **Cure:** There is no "cure," but it can be managed through a long [[time horizon]] and proper [[asset allocation]] (e.g., mixing stocks with [[bonds]]).
===== A Value Investor's Perspective =====
A [[value investor]] seeks to mitigate risk by doing deep homework. The goal is to understand a business so well that you can confidently estimate its true [[intrinsic value]]. By purchasing the stock for significantly less than that value—a concept the father of value investing, [[Benjamin Graham]], called the [[margin of safety]]—you create a buffer against unforeseen problems and bad luck.
However, even the most brilliant analysis can be wrong. The future is uncertain. This is why Graham himself was a staunch advocate for diversification. He argued that while a margin of safety protects you on each individual purchase, diversification protects you from the inevitable error or unlucky break that even the most careful investor will eventually face. The takeaway is simple but powerful: do the work to find wonderful businesses at fair prices, but have the humility to know you could be wrong, and spread your bets accordingly.