Don’t Diversify

January 22, 2009

Everyone from investment advisors, business school advisors, Jim Kramer, etc. espouse the ideology of diversification. They tell you that in order to grow your assets and reduce your risk, you should diversify because you don’t know what will work. Well, this strategy works fine as long as the world doesn’t go into a deep recession. The thing is, the worst happened in 2008 - everything went down, commodities, stocks, bonds, and real estate. It’s like the A-Bomb was dropped and everyone who diversified lost money. I was well diversified as well, investing in bonds, stocks, foreign, domestic, etc. I definitely wasn’t shielded. It’s time to shift strategies not only in investing, but also in business.

We need to have a fresh perspective. The whole notion of diversification turns out to be a reasonable way of protecting assets because generally speaking not everything goes down at the same time, some stuff actually becomes more valuable thus protecting your assets.

Now, if you want to create wealth, how many people on the Fortune list of billionaires do you think diversified their way to the top? Bill, Carlos, Steve, Warren? Ok, maybe a little Warren, but even he had most of his wealth tied up in Berkshire. Diversification is a terrible way to create wealth. Concentration, on the other hand, creates wealth. It can also create ruin! Isn’t life a bit more exciting if you were capable of becoming rich or poor and not just average?

Here are some of my random thoughts on how to “un-diversify” in this environment and make some exciting bets in a time when everyone is thinking about what they should do and unable to.

1) Reduce your household monthly spending. If you have a lot of expenses, you’re stuck and unable to take concentrated risks. Reduce your spending, allow yourself the ability to take more risks in this environment.

2) Focus on one day job. Forget about doing a startup and holding a day job. Do one job and do it well… Make it your startup. Be like Bill, Steve, etc. They didn’t have multiple day jobs. If you can’t do it now, set a goal to get there.

3) Build equity for the long-term. Don’t day-trade your startup - i.e. build for the flip, flip homes, etc. Focus on building long-term and you’ll have more options short and long term than you can imagine. What does long-term mean? Get profitable.

4) Stop watching the market. CNBC is financial porn. Kick the habit. If you can’t stop watching, sell everything and get into cash so you can sleep at night and keep your focus on building equity. Better yet, just buy US treasuries and call it a day, if the US goes bankrupt, you and I have much bigger problems to worry about. You have more than enough risk in your business.

5) Write down your 30-60-90 day plan. You can ill-afford these days to be floating around wondering what you should be doing next. Have that plan hanging in plain sight at all times, as soon as you start straying get yourself back on track by reviewing your 30-60-90 day plan. Review it, memorize it, and adjust it if necessary.

6) Give - I’ve mentioned this before, it will help you focus and concentrate your efforts by giving you more perspective. It truly is the secret to success.

7) Get Buy-in - from your team. Everyone should have the same exact mission and vision for the company. They should all be pointed in the same direction. If you don’t have buy-in, get them off the team now. Or, force yourself to create a vision that everyone can get behind. Diversification of vision and mission across team members is a recipe for disaster and it sucks!

8) Reduce your stress level. Everyone is so stressed, what for? Like stress will solve your problems or create a successful business? Work out, relax, don’t worry even when you are working. You’ll live longer and trust me you’ll be able to concentrate better.

What do you think? Do you agree that diversification is BS? Or, should we diversify more? Let me know.

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32 Comments »

Comment by Geiger Subscribed to comments via email
2009-01-22 08:50:30

What a horrible thing to say to “Joe-Worker”. Sure, if you want to be a billionaire concentrate on what you do well. With the market down invest big and diversify and I bet you’ll be better off in 5 years than the one guy who tried concentrating on just one investment.

Now, if you’re doing a startup, this is different and nothing to do with your retirement financial investments.

Comment by Andy
2009-01-22 10:59:37

Thanks for your comment, but I’d disagree. Financial advisers who make their fees off of “Joe-Worker” no matter if the market goes up or down really got hurt in ‘08. Not only are you not getting market returns, but the fees give you below average returns every year - it can really kill you long term. My viewpoint is, if you must invest in this market go “safe” - US Treasuries and concentrate your risky investment dollars in your startup. Now, I’m not a paid investment adviser so take my thoughts with a grain of salt ;)

 
 
Comment by Jeff Subscribed to comments via email
2009-01-22 08:59:37

Your right, diversification in this sense, causes unneeded complications. Focus on your core competencies, get rid of the rest.

 
Comment by Drake
2009-01-22 09:32:40

Andy,

Very thoughtful, fresh perspective. I agree that focus a.k.a concentration (”The ability to think of nothing while doing something”) is vitally important to success and being good at everything, great at nothing is a liability now.

I would add: When you are honest about your most personal motivations, you can unlock your passion and set your course. Passion or drive if you will is the fuel that sustains the energy level you need for the for the long road that success demands.

Thanks for sharing. Look forward to more.

Drake

Comment by Andy
2009-01-23 00:17:11

Great add - Passion!

 
 
Comment by Trigeia Twinz Subscribed to comments via email
2009-01-22 10:25:42

We do not think that there is some secret potion to success of even becoming wealthy. Some people think about riches and never get there because they dont have a plan, others make a plan and pursue their passion and then they get lucky. Luck is the only secret to wealth. Of course there is a way to better your chances of luck. Iam not sure if diversifying in your business will better your chances. We do know that working towards a common goal with your team does.

It is also interesting that we research many people and identify their passion on our blog. What we have learned from this is that those that are the wealthy, those that have created great change and those that have achieved great success all have one thing in common. They knew their goals and through hard work (and the most important of them all) they built lasting relationships and these relationships are what took them over the top. If you want to be a master of success remember this “it is not what you know, It is who you know”.

Keep Moving Forward. Thanks for the post.

To our continued success,
twinz

 
Comment by Chuck
2009-01-22 10:32:25

Diversification is only applicable when the “investor” can not stomach quick and dramatic swings in the value of the investment.

Diversification is a great way to grow things slowly (like you said), because in theory your volatility will be less.

Concentration however is the road to both quick riches and quick failure depending upon your luck (or skill) of choosing the correct investment.

Whether the investment is a stock/bond instrument, or a startup the same holds true - your time & money will be spread amongst many startups if you diversify and thus they would grow slower.

Choosing which theory to pursue is most determined by what you feel you need. (Bill & Steve were still in college / drop out so their needs were much lower in terms of financial stability - if their stuff didn’t sell there was always next semester).

 
Comment by Charles Lloyd
2009-01-22 10:32:59

Kiyosaki in one of his book said the same thing, I like the guy, some hate him, read his Prophecy book he published back in 2002/3 all is predicted.
Basically he said if your diversifying you don’t know what your doing. Which at its core is true.

One example he used was buying a car. Do you go buy 3 or 4 cars just in case one breaks-down when your trying to go to work? For most no, you get one car that works and use it, if you bought a good car then you wont have anything to worry about.

He also used the example of Microsoft and Warren Buffett

Comment by Article Spinning
2009-01-22 14:50:19

Yes, Charles. Robert Kiyosaki is someone I admire strongly (I have ALL his books and games). One of his most scorned books (which has now become a revelation of sorts) is the “Prophesy - Why the biggest stock market crash in history is STILL coming and how you can prepare yourself and profit from it”. When he released it, they all laughed at him and thought he was crazy… guess whose laughing now, LOL

Comment by Charles Lloyd
2009-01-22 16:19:20

I honestly believed him when I first bought the book at Sams Club.
I still think a depression is coming or were at the start of one now. Kiyosaki is well thought out. History repeats itself, and once every 7/80 or so years a depression comes, that is just the way it works. The people who provide true value can become very very financially rich.

(Comments wont nest below this level)
 
 
 
Comment by Greg Subscribed to comments via email
2009-01-22 12:04:46

Great comments. Diversification has a place in portfolio management, but it’s not the way to create wealth. Diversification is a great way to preserve wealth, not build it. If you’re sitting on $100M and want to keep it and grow it sensibly, you don’t do that by concentrating your bets. You do it by intentionally spreading assets across uncorrelated asset classes. In any given year, especially during a complete financial meltdown like the one in which we are currently engaged, you may be down across several asset classes, but over the long run you will have improved your risk-adjusted returns. Some investments will perform well and others will not. You could go all-in on US Treasuries, but in the current environment that doesn’t work either–inflation would erode your “nest egg” and US Dollar volatility would add unwanted risk and expose you to loss of principal/global buying power. That’s enough about preserving wealth.
When it comes to creating wealth, you can only accomplish that by taking risks and getting lucky. Getting “lucky” sounds so passive and out of control, but in reality you can do all the right things in building a business, but if you do them at the wrong time you can wind up with a goose egg. Conversely, the world is littered with people who have done few of the right things, but took a risk and had extraordinary timing and ended up with a fantastic payday. Unless your day job was Microsoft in the late 1980’s or Google, EBay, Amazon, etc. during their haydays, you don’t get lucky by doing your day job and waiting for fortune to appear in your lap. You have to take risks, either with your time or your money and things have to work. The $25,000 investors in Amazon in 1995 look pretty damned smart now. Lucky or smart, I wish I had been as smart as they were to take that risk.

Comment by Charles Lloyd
2009-01-22 16:27:30

The only problem with trying to preserve money is if you dont grow it at a better rate it is being printed, you losing money.

Money is like a plant or a business its either growing or it dying, stagnation is dying.

 
 
Comment by jtGraphic
2009-01-22 12:19:06

-”CNBC is financial porn.”

That made me laugh. You’re very right, but I would also edge in a word of caution: I suggest diversifying your needed wealth and being safe, while making risky bets with your disposable wealth, which rings with your “keep your day job” bullet. Stay safe enough to survive, but risk a bit when ever you possible can.

 
Comment by Miguel Salcido
2009-01-22 13:25:08

Focus Focus Focus - Its the key to excellence and profits. Great post! I never really looked at things from your perspective in that because of the economy, diversification is no longer as valid of a strategy.

 
Comment by Charlie
2009-01-22 13:55:29

Great post. All your posts are truly inspirational and helpful. Thank you.

 
Comment by Harnish
2009-01-22 14:31:00

Andy,
As an investor myself there is much more to answer to your question at the end of the post than black or white choice. And actually you have touched upon the subject briefly by saying “if US fails we have bigger problems sentence”. The thing for investors to ask themselves is how long are they investing for (5,10,15 yrs or for retirement?). There is no right or wrong answer. And certainly I do not agree with Don’t diversify as an absolute statement. If people are in for the long run then things are going to fine in a true free market. There are cycles like these that have we have to go through to cull the excesses of free market but the innovation that free market enterprise brings always tends to increase the wealth of the market constituents.
Andy you are touching 2 different subjects (and to an extent unrelated ones) in comparing investment strategies to building one great thing. Now Berkshire is a conglomerate with diversified portfolio such as SunTrust Bank to Coca Cola to being suppliers of home building and insurance. So sure as much as their diversification has exposed them to many risks and when most of those risks have turned negative, their overall portfolio looks completely ravaged. And as Warren Buffet talk about his strategy in an Op-Ed in NYTimes I completely agree with this statement ” is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up”. He says and I again COMPLETELY AGREE with this quote of his: “A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
Now all of your advice is top notch from lowering expenses, giving etc whether times are good or bad. I have absolute respect for you saying those things.
Let me know what you think Andy.

Comment by Andy
2009-01-23 00:27:50

Harnish:
Thanks for your well-thought out reply. I think you bring up some very interesting points. First, I do think in the long run the market will come back. Diversification does generally protect assets except for “long-tail” events such as the mortgage-backed meltdown of 2008. It just doesn’t feel right that people who were close to retiring who had paid handsome fees to their advisers to build a well-diversified portfolio now have to return to work. In retrospect, had they bought US treasuries, would they have been better off? Perhaps. I find it interesting that Buffett has never bought a mutual fund, he picked companies that he believed in to invest. I’d challenge people to think of their business and their investments as part of the whole picture. If you have enough risk in your business, no need to have to take on more risk such as a diversified or managed portfolio run by your lousy manager - all due respect to money managers out there ;)

 
 
Comment by Article Spinning
2009-01-22 14:46:41

Very interesting piece, Andy, AGAIN, :) I agree with you about the danger of diversification. I can’t remember who said it or the exact words, but it’s something like “People say I should there’s danger in putting all my eggs in one basket, but I don’t agree. They say I shouldn’t put all my eggs in one basket, but I don’t agree. I WILL put all my eggs in one basket and WATCH that basket”. LOL

 
Comment by Article Spinning
2009-01-22 21:20:07

Reminds me of a statement I read sometime ago - “While others say I shouldn’t put all my eggs in one basket because of the risks, I don’t listen - I go ahead to put all my eggs in one basket and WATCH that basket!, :)

 
Comment by Jon M.
2009-01-23 00:19:17

Nice post Andy. Though I’d tend to disagree with your conclusion. Diversification should help limit losses–and likely did in the last year. Yes, everything went down this past year. But pity the guy who was concentrated in high dividend-yielding bank stocks, or mortgage-backed securities, or was long in oil futures– I could go on.

The point is that in the long term, diversified portfolios outperform concentrated ones because they reduce risk factor, while still allowing you to be exposed to the next sector of fast growth. Admittedly, this strategy will not get you rich–it will allow you to outperform.

That said, I think your point was to encourage entrepreneurs to invest in themselves and their ideas–hence the examples of Bill, Carlos and Steve. Is that correct?

BTW: Thank you for giving me the advice for #2 years ago. It kept me at my current company and helped me learn my business and refine my ideas before venturing out.

 
Comment by varinder
2009-01-23 00:27:45

Hey Andy,
An eye-opener is this post. The secret of success lies in concentration, the more concentrated you are, the more success will be yours. Just bury the worry and concentrate at one job and you will excel. Nice!

 
Comment by Escalate Media
2009-01-23 07:38:49

another great post by you Andy… prior to reading this we had already started working on regaining our focus as we were going in 10 directions now we are going down several paths but only one at a time so we can focus on it and nail it.

 
Comment by Johnny
2009-01-23 09:40:18

This is a very complex issue and there are so many ifs/ands/buts that a complete discussion would be lengthy (after all, using a index as a proxy for an asset class in an efficient frontier model would also be diversificaiton - anything other than a single bond or a single stock or a single VC investment, etc. would be diversification).

The closer you get to retirement age, the lower the amount of risk that should be in your portfolio. This means your portfolio strategy should change as your needs and time frame change. Hopefully those folks that were close to retirement before the stock crash were already allocating less to stocks than to other less risky assets.

For myself - who has min. 30 years before retirement, bring on the Microcap fund. I am putting 100% in the riskiest asset class available in my 401k. When I only have 15 years, I might adjust things a little, 10 or less years and things would be getting much more conservative. (not actual advice, not a advisor, just a guy with a keyboard ;)

Same goes for startups - at this point I still have time for a lot of failures. If I were 55, I might spread it around a little. And just like in investing, there will be a more efficient mix of opportunities to put my time into.

 
Comment by Gert Subscribed to comments via email
2009-01-23 17:31:59

I believe the problem is that there are tons of people with qualifications as diversified as you can possibly imagine. What is really hard to find sometimes is a person specialized in one or two areas that can just get the job done.

Diversification might be good at the beginning of your carreer, but after gaining some experience I think those who are experts in one or two fields will be far better off.

 
Comment by J
2009-01-24 15:49:39

I am one of them who believe in concentrated efforts vs diversification. I think one of the main points that are often overlooked is that, how you play the game is not the problem, it’s what you do when you are playing the game.

You don’t just pick a few options that you *think* might make you money. Over the time so many people even forget to update themselves on things but it’s okay, because you think the risks/losses will be averaged out right? With just one option, you spend your time to research and know everything inside out. If there is a problem coming, you know and you get out before it hits you. The risks are not because of some unforeseen circumstances that drop out from the sky one day. The risks can be reduced by doing your homework. Many saw this recession coming. Most others were too busy doing something else and fantasizing about their investments.

Personally speaking, if one could thoroughly research and update themselves on everything, diversification wouldn’t be a problem at all. Just that time is always a limiting factor, and I would think that one would be better off just knowing one thing 120% than 12 things only at 10%.

 
Comment by Ron Hekier
2009-01-24 23:47:54

I am reminded of Peter Lynch, the famous former manager of the Fidelity Magellan Fund. He coined the term “diworseification.”
However there is a danger to ignoring expansion to a new field. One may end up with stagnation instead of diversification.

On a different note I highly agree with your advice to “give.” Providing aid and charity to others is more important when one is faced with uncertainty than when one’s financial outlook is rosy and stable.

Lastly your advice to document a 30, 60, and 90 day plan is invaluable. Studies have shown that those who write down their goals are far more successful than those that do not.

 
Comment by HOBO(nickname)
2009-01-25 01:26:42

I agree that diversification is important.
One should do what he is best in but other than that one has to do a business which is related to daily cash income. Restaurant is one fine example.

 
Comment by Sean
2009-01-25 01:44:22

Agreed, most of the ultra successful people I personally know have made the vast majority of their wealth by hitting it big with a single business (with a combination of crazy hard work, smarts, brass balls and of course - good timing or luck as some people would say!). Only then did they start to invest some of their money outside of their business into other ventures like real estate (mostly undeveloped parcels of land). If you are really good at something and fall into the 1-2%, why would you invest outside of that core competency? Diversifying would be fool hardy. And in terms of risk, even if you were to go bankrupt in the worst case scenario, chances are you could use your skills and experience to be back on top with 3-5 years anyways.

 
Comment by Winning Solutions
2009-01-25 10:41:55

Diversification is a must considered for any business at a level. Keeping money idle is the worst practice in business. When you see that some money in your investment budget is idle after touching all your areas in one business, you should definitely consider diversifying. But when there is a recession around, you need to think 4 or 5 times before taking a decision. You just got to be sure about your safety measures and should have a solid advisory team.

Andy,

Can you please explain a bit more about your 7th point? Am not getting it clear.

 
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