Perhaps. But if you know what you're doing, wide diversification may not be wise.
"How many insights do you need? Well, I'd argue: that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man—Warren's a lot more able than I am and very disciplined—devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple."
The Berkshire Hathaway quote illustrates the diversity point here. Berkshire made a lot more than 10 investments, just those 10 returned most of the money. If they knew in advance what those 10 would be they would have only made those 10 investments, but they didn't so they diversified.
The purpose of diversification is in case your insight is wrong. In case bitcoin crashes faster than he's able to pull his money out, or in case demand slackens and prevents him from pulling his money out (being able to transform money from bitcoins to dollars is necessary until all the places he would spend money accept bitcoins too), being diversified would prevent him from losing everything.
And I agree that you probably shouldn't put all your eggs in one basket.
But that doesn't mean that wide diversification is the right strategy.
I think some of the greatest successes have occurred because of an obsessive focus (e.g. Apple, Pixar, 37signals, Trader Joes, Chipotle, Berkshire Hathaway, top professional athletes).
Apart from the fact that you're comparing the obsessive focus of a business plan to that of a portfolio, you realize that Berkshire owns NetJets, Dairy Queen, Borsheim's jewelry, insurance companies, and the Burlington Northern Railroad, right?
"Obsessive focus on being awesome" is not a non-diversified investing strategy.
>"Obsessive focus on being awesome" is not a non-diversified investing strategy.
I disagree. I think focusing on only owning/investing in "All-Stars" is a non-diversified investing strategy.
"Berkshire's CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required."
In the tech world VCs and angels seem to want this too. If they only invested in Google, Facebook, Twitter, Groupon, LivingSocial, Amazon, Spotify, etc., I think they'd be perfectly happy.
IMO, DST seems to be implementing this strategy, at least to some extent.
I disagree. I think focusing on only owning/investing in "All-Stars" is a non-diversified investing strategy
Only if you want to abuse the term "diversified investment strategy" to the point where it becomes meaningless.
When we say you should have a diverse portfolio it does not mean "diversely spread between good assets and crap assets". You should only buy good assets. But you should buy multiple good assets, largely to protect yourself from the fact that what you think is a good asset may in fact be crap.
Look, I understand you're trying to be contrarian here, but "diversify your assets" isn't a point that leaves a lot of room for contrarianism.
I think it's less useful, when picking a strategy, to know what percentage of great successes were caused by obsessive focus than to know what percentage of obsessive focuses caused great success.
Perhaps. But if you know what you're doing, wide diversification may not be wise.
"How many insights do you need? Well, I'd argue: that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man—Warren's a lot more able than I am and very disciplined—devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple."
-Charlie Munger
http://ycombinator.com/munger.html
Re: 2
"Too much of a good thing can be wonderful."
-Mae West