“Diversification is for idiots.”

"DIVERSIFICATION IS FOR IDIOTS"

Let’s play a game about diversification. Who do you think said the following?

  • “Diversification? Any idiot can diversify a portfolio.”
  • “Asset management, you know, diversification, that’s for idiots.”
  • “Diversification, as practiced, generally, makes very little sense for anyone that knows what they’re doing. Diversification is a protection against ignorance.”

I’ll leave a little space here so you don’t accidentally read the answer if you want to guess.

If you said Mark Cuban, Warren Buffet, and Charlie Munger, you’d be right. On the outset, it makes sense for Cuban to have this opinion. He’s an aggressive guy who won his fortune via startup. But for legendary investors Buffet and Munger, it seems a bit more surprising they would take this view.

Diversification is popular Boomer advice because they’re not trying to grow their fortune, but protect it. Most people who are multi-millionaires, especially later in life, are not interested in aggressive financial moves. They want to keep what they’ve earned.

Buffet’s statement “Diversification is a protection against ignorance” is a bit more gentle in its delivery. Buffet is speaking two ways: if you’re a true professional, you should be deeply knowledge invested in an industry. If you’re not, and don’t want to be, then diversification is your friend.

If you don’t want to be aggressive with your money, diversification is just fine. However, that’s not what this blog is about, is it.

Why You Should Go All-in

If you’re trying to get rich, you need this attitude. This doesn’t mean a 100% portfolio allocation. It’s more about mindset: know what you’re investing in.

However, better than even investing in a great stock pick is going all-in on a business of your own making and management. It’s living life with skin in the game.

But back to diversification.

“It’s crazy to own 50 stocks or 40 stocks or 30 stocks.”

Warren Buffet said this, too. This is wise advice no matter what kind of investor you are.

If you truly want diversification, why wouldn’t you just put your money in an index fund and be done with it? It’s built-in diversity.

If you want specialization, go in on a maximum of 10 businesses.

No human can properly assess the value buy of more than 10 stocks, and 10 itself is probably pushing it. Anything else is gambling (which is fun, but not investing).

I say a max of 10, but my personal max is more like 5.

Here’s the ancient wisdom on diversification. The Bible says in Ecclesiastes 11:2, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” (NIV).

Is this diversification? Yes. Is it diversification to the level you can still track and understand what you’re getting into? Yes.

My Personal Diversification & Allocation

I probably have about 80% of my portfolio in just two assets, 15% in cash, and 5% for experiments and learning. I am not diversified by almost any measure.

My two assets are one single stock and Bitcoin.

For the stock, I’m bullish on it long term. I also write call options in the short term (on only some of my shares) to make some money while I’m holding it. It’s a volatile stock so the premiums are high enough so writing the option is worthwhile for me. I also own a few far out-the-money (OTM) options myself, so in case it moons they will be worth much more than I paid. This is honestly unlikely, but it’s an asymmetric risk-reward profile, so it’s worth it for me.

For the Bitcoin, I’m simply holding it forever. When I feel like I’ve gotten the investment I want out of my stock play, I’ll move most of those gains into Bitcoin. At time of writing, 1 BTC = 62,680 USD. That is a steal to me, so I’m trying to earn more money to put into BTC for safekeeping. I see Bitcoin as safer than the US dollar long term, even though it’s hella volatile in the short term.

RELATED: Bitcoin vs Stock | What’s the Right Balance?

I also keep around 15% in cash so it can be ready to deploy into sudden price drops in the stock or crypto and there’s a buying opportunity.

The other 5% is for things I run small experiments on: an option on an interesting company, buying a random altcoins for fun, and 10 shares of AMC because I thought it would be funny (update, I sold this when it ran up to 55 which ended up being decent timing. I may or may not have a position in it now).

Diversification is Good When You’re Running Experiments

An experiment is inherently based on ignorance. That’s why you experiment: to learn.

You should always be learning something.

Why invest into experiments with real money and not paper trades? Because you tend not to learn about investing until you’re doing it with real money. You need to feel the stress and decide what to do. Otherwise, you’ll just tell yourself “I would’ve bought this at X price, I knew it was good” like a loser, bragging about the ghost gains you didn’t earn.

Outside of learning, I go deep into just a handful of things I understand.

Could my un-diversification result in catastrophe? Sure.

I’ll risk it.

However, better than any stock pick, in my opinion, is going all-in on a business of your own making and management. It’s living life with skin in the game.

Stocks and investing is fun. It’s like a game. A better game to me is running a business. Ultimately, that’s the best way to “undiversify” your investment.

As for me, all of my investing is subject to change because I may find a great opportunity or want to start my own business. One day I could liquidate it all (or could have already by the time you read this).

Until then: study up and go all-in.

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