I wanted to update something I said before, that you do not intentionally diversify. Personally, I do not diversify among sectors but I do diversify among business models. I still strive to pick the 10 best companies I can, but I try to pick the best of breed company based on business model.
For instance, several internet companies that I know of make most of their money selling advertising. I would generally choose the best company that makes most of their money selling advertising, although more than one does a bang up job generating revenue with advertising.
Similarly, if two companies are selling a large product line to customers at retail, I would only choose the best one. Since I only have 10 companies in my portfolio this is pretty easy to do and still choose great companies.
Note that I know of a company known for a specific business model but when you look deeper you find that most of their money is made a different way. So make sure to do your research!
What you want to watch out for is intentionally choosing a company because it is in a certain sector, especially if that sector is not as profitable as another one. Should you buy your 10 companies all from the most profitable sector? I would look at the company mainly, seeking to find 10 awesome companies, then make sure you are not overlapping business models between two or more. All 10 of your companies can come out of the same sector if you like, you just have to make sure you have the stomach for the volatility.
A sector, by the way, is a bigger grouping such as Technology, Health Care, Financials, Real Estate, etc.
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