Is Investment Diversification Overrated?

Summary

Market Mondays: Is Investment Diversification Overrated? Episode Release Date: December 13, 2024

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Introduction

In the December 13, 2024 episode of Market Mondays, hosted by the EYL Network, Ian Dunlap and his co-hosts delve into a provocative topic: the efficacy of investment diversification. The discussion challenges conventional wisdom, questioning whether spreading investments across various assets truly serves investors or if a more concentrated approach yields superior returns.

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Hyperfocus vs. Diversification

The conversation opens with Ian Dunlap advocating for a hyperfocused investment strategy. He posits that many wealthy individuals and corporate leaders have amassed their fortunes by concentrating their investments in a single asset or sector.

Ian [00:00]: "Most people that make their money make money on one thing. So it's like Mark Zuckerberg became a billionaire because of his stock in Facebook... Nvidia stock... Apple... Microsoft."

This perspective emphasizes that major stakeholders often derive substantial wealth from concentrated holdings rather than a diversified portfolio.

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Arguments Against Diversification

Michael engages with Ian's viewpoint by aligning with renowned investor Warren Buffett's stance on diversification. He suggests that diversification is primarily a strategy for those unfamiliar with investment nuances.

Michael [01:36]: "Diversification is a distraction to tell you from how to really build wealth, in my opinion."

He further references historical business titans like Rockefeller and Carnegie, who achieved monumental success through concentrated investments. Michael underscores the idea that focusing on a select few assets allows investors to deeply understand and capitalize on their chosen investments.

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The Concept of 'Right Diversification'

Ernest introduces a nuanced perspective, differentiating between over-diversification and strategic diversification. He acknowledges that while leaders like Zuckerberg invest heavily in their primary companies, they also hold significant stakes in other reputable firms, albeit in controlled numbers.

Ernest [03:15]: "Rockefeller has stock the employees in Nvidia, but he's diversified in companies, right?... he didn't try to find 40 different companies... these are my core assets."

This approach advocates for a balanced portfolio where diversification exists but within manageable limits, ensuring investors can effectively monitor and leverage each investment.

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Managing Portfolio Size

The discussion then shifts to the practical aspects of portfolio management. Both Michael and Ernest agree that there is an optimal number of investments an individual can effectively manage.

Michael [05:19]: "Once you get past 10, it's too much. I think past 10, you can manage four to six with no stress."

Ernest [04:42]: "Stick with those. All right. And you might just have to wait and just be patient like going back to the first, be patient with those companies."

They recommend maintaining a concentrated portfolio of around four to twelve assets. This range is deemed manageable and allows investors to dedicate sufficient attention and resources to each investment, enhancing the potential for significant returns.

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Conclusion

The episode of Market Mondays presents a compelling case for reevaluating traditional investment diversification strategies. While diversification offers risk mitigation, the panelists argue that a more concentrated investment approach, when executed with diligence and understanding, can lead to greater wealth accumulation. They emphasize the importance of managing a limited number of high-quality investments, allowing investors to stay informed and make strategic decisions that align with their financial goals.

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Notable Quotes

• Ian [00:00]: "Most people that make their money make money on one thing... Mark Zuckerberg became a billionaire because of his stock in Facebook."

• Michael [01:36]: "Diversification is a distraction to tell you from how to really build wealth, in my opinion."

• Ernest [03:15]: "He didn't try to find 40 different companies... these are my core assets."

• Michael [05:19]: "Once you get past 10, it's too much. I think past 10, you can manage four to six with no stress."

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This in-depth discussion on Market Mondays challenges investors to consider the benefits of concentrated investment strategies over traditional diversification, providing insightful perspectives from seasoned financial experts.

Transcript

[Ian]

But there is something to be said about hyperfocus because most people that make their money make money on one thing. So it's like Mark Zuckerberg became a billionaire because of his stock in Facebook. Right. That's how he became a billionaire. Right. And you could say the same thing with almost any of these company CEOs. And you know, that's how, you know, Nvidia went up and all of those people that became millionaires because they were employees from Nvidia, that was because they had Nvidia stock, not because they diversified, because they had Nvidia stock. And the same thing happened with Apple and the same thing happened with Microsoft.

[Michael]

Where back in the day. Yep. Yeah.

[Ian]

A lot of these companies when they, they got filthy rich off of one thing, they didn't get rich by spreading it out across.

[Michael]

Yeah.

[Ian]

You know, but that's also. Obviously there's more risk. There's more risk involved with that. Right. But that, that some people think that that's better way to go. Like just focus on one thing and really focus on that one particular thing. Michael, Michael Saylor said something about this. He was like, oh, it's like having a kid that's talented in basketball. If you have a kid that's talented in basketball and they're showing signs and they're promising, you don't get them swimming lessons and karate lessons and tennis. You double down on basketball and you get them personal training and that you don't. There's no, there's no benefit. And trying to say, okay, well if you don't make it in basketball, then maybe you'll be a good tennis player. Right?

[Michael]

Pickleball player.

[Ian]

Yeah, exactly. You focus on that one thing. Right. So what's your thoughts on, on that?

[Michael]

You don't have to believe me, but remember when I said Warren Buffett said it in the Berkshire meeting, Diversification is for people who don't know what they're doing. That's true. What put in chat. What did Rockefeller get rich from originally then Carnegie, if you go to the titans of business, they all have hyper concentrated. So I think a lot of times there's the truth that is told to the public to pacify and then there's the real information that has. But that happens behind the scenes even for us. Me doubling down on Red Panda, you guys doubling down on earn your leisure. I just pay dividends. Zuckerberg invest in the Meta has paid dividends. So I think once you find an asset class that works for you and you put all of your money, attention and focus like and the thing that Cuban has said, you only have to get right one time. You don't need 16 ventures to work. Like, we've been fortunate to have a bunch of things work in our favor, but everything's centered around a course. So when people try and want 30, 40, 50 stocks, I'm like, it's because you don't know how the other ones are going to pan out. Like I know what the multiple for Apple should be by 2040. And Nvidia and Microsoft and Vanguard and BlackRock took over crypto, so that's expanded their portfolio. So I think too oftentimes people think when you hear multiple streams of revenue or income, you think it's to do different things, but you have to find to make revenue off of one item in a bunch of different ways. So it's always been the way to go. Diversification is a distraction to tell you from how to really build wealth, in my opinion.

[Ernest]

So here's the, the one caveat, right? Maybe asterisk. I would say the right diversification, right? Because if we, if we're talking about like the guys you mentioned, Zuckerberg has stock the employees in Nvidia, but he's diversified in companies, right? So like yes, all his nest egg wasn't in Apple, but Apple's his largest shareholder, right? So American Express, Coca Cola, he didn't try to find 40 different companies. He said these are my courses, right? This is what I like.

[Michael]

Even the beginning going to the 60s when he first built it, that fund and it took scale. He has six.

[Ernest]

Yeah, it's not a large majority of companies he's looking at, he's hyper focused on five or six and it's like, all right, well I can focus on these, these are the ones I can concentrate on because I can actually follow them. And we said this for the past five years, it's tough to follow 15, 20, 25 companies.

[Michael]

Possible brought a filings and. Yeah, yeah.

[Ernest]

So when people start trading 5, 10, 15 start getting to 25, 30, there's people with 50 option calls. This is tough to track, right? That's when we're talking about you. You now you've over diversified. Now this is becoming something that's not even manageable. You got a core four, core five or six, I'll say like 10 to 12 at the most. Stick with those. All right. And you might just have to wait and just be patient like going back to the first, be patient with those companies. Wait for the right time and execute when it's done.

[Michael]

And even with two Tech two indexes. People will say, well if you don't believe in diversification, you why use 2Tech to index what percentage of VO is made up of tech and what percentage of VTI? If you go look, there's even hyper focus there. If you look, there's some diversification because the portfolio managers will switch certain things out. But there's always been a focus on a particular sector. For me it's been tech. So just double down on the assets that you know that are working and don't deviate from them.

[Ernest]

Important.

[Ian]

All right, so but how many is because that. How many is too many because you. Some might say that the theory is like four is too many or six is too many.

[Michael]

Well, I think once you get past 10, it's too much. I think past 10, I think you can manage four to six with no stress. 8. You start to teeter even in trading futures. I told everyone a red Panda Trade ES ZB bond and S P500. It makes it super easy. Then you add a NASDAQ and UB, which is of course the NASDAQ 100 and another bond like the simpler the structure is, the better it is to manage. Cause most people can't find lightning in a bottle 10 times. If you can, great. But I think four is easy to manage. Once you get to 10, 12, 15, 20, it's too much. A lot of trouble.

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[Ian]

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