Something set us off this week.
And we think this is common wisdom to anyone reading this blog ... but just in case, here goes nothing:
"Everything in moderation"
"A little of this and a little of that" (not even sure if that one is a saying - I may have just made it up)
It's all bull crap.
And it hurts perfectly innocent people.
I've never met ANYONE, who has achieved ANYTHING via diversification.
Yet, it's routinely accepted as common wisdom...
"A diversified portfolio is wise. X % of your assets in Y. Another % in Z and yet another in @#$."
Or something like that.
What the heck is that crap?
Has that actually worked for anyone? Seriously, has it?
Maybe once they've made their money it's a weak way to try and not lose it ... but to make money in any real way, has that approach EVER worked?
I vividly remember the very TOP sales reps at Oracle being supremely focused on ONE SINGLE strategy to attract and close sales.
Some zero'd in on relationships with resellers. Others would master referrals. Others would only work with prospects who proved they had budget, time frame and need ... they hung up and even ignored tire kickers. Some even ran their very own, very specific, marketing campaigns.
The "average" sales reps entertained all comers.
Anyone who had a pulse made it into their sales "forecast" ... often with wonderfully over blown expectations of actual deals to follow.
It was amusing to watch and very instructive.
Sometimes I think my time at Oracle in the middle of 100 or so sales reps was like a huge physcology experiment that I got to live in the middle of ... for years.
The top guys/gals didn't "diversify" their approach.
I've also noticed that this idea of diversification doesn't work in fitness either.
The very best athletes that I've been able to watch closely or learn about have a one track mind.
They are OBSESSED with their scheduled workouts, their nutrition, their mental focus ... everything.
They don't go into a practice or gym workout "when they feel like it" ... they are supremely focused.
They may mix their training disciplines but they're focused on one single thing ... training.
Someone recently said this to me, "Boy, it's never a good idea to put all your eggs in one basket ... you should really diversify out of real estate more."
Neither of us have EVER seen ANYONE make any progress in building their wealth through diversification.
You can't get to the point of mastery with anything when you diversify.
"Everything in moderation" is a huge cop out in our opinion.
Have you ever met anyone who masters trading options but can also flip properties like Donald Trump?
Neither have we.
Have you ever met anyone to succeed on a diet when they "diversified" and went on and off it like a game of hot potatoe?
Here's where we think the bad "diversification" advice comes from:
A) Financial Advisors who don't have the guts to recommend a single asset class because it requires tons of research and conviction to do so.
B) Newspaper reports that illustrate the holdings of top investors who outline their diversified holdings.
For example, recently we interviewed Eric Sprott ... a Canadian Billionaire ... if you look at his asset base today it's full of different businesses, different stock holdings, different commodities and other wonderfully interesting things.
But when you're worth a billion dollars you can have all these things and still be super focused on a single asset class. His favourite? Precious metals.
He famously publicly stated at one point that 90% of his assets are in gold and silver.
That doesn't seem too diversified to us.
Single, often obsessive, is required to really break through your current level of anything.
Richard Branson didn't diversify into a million business until he hit it big with one ('Losing My Virginity' is a great read about him by the way).
In the real estate world we've watched many people buy a property, become frustrated with a situation, get discouraged ... go away for a while to trade stocks, then come back when that doesn't work out to investigate a different type of real estate investing, dabble in that ... go away again to greener pastures.
They are wasting precious time.
They aren't mastering anything.
Mastery in any subject matter is a lost art.
We all Google a subject, read two sentences in Wikipedia about the topic and feel we know it.
Starting a business requires little diversification as well.
You need singularity of focus to create enough momentum to start a brand new business.
You almost need to put blinders on and ignore the world for a little while.
So many new business owners lose their way because they try to be all things to all people.
Figuring out who you are, what you are about and stating that to the world has a certain attraction to it.
And it lets you focus on mastering your business processes on one single thing.
After that first business process is humming you can then add others ... but not until the first is mastered.
Becoming great at one single thing allows you to charge a premium for it - and then you can be happy 🙂
The common wisdom of diversification freaks us out because it could be holding a lot of people back from achieving the results they want.
If you see a shredded Saturday newspaper on the floor at your local coffee house it may be because there was yet another article about the value of diversifying your portfolio and we shredded it to pieces.
(for the record I swear we're nice people)
Until next time .... Your Life! Your Terms!
Agreed! Diversification = mediocrity. It's safe. Great performance = Focus. It brings clarity and understanding!
Extremely well said, couldn't agree more.
Most people don't understand investing and Should not choose an individual asset class. Yes a lot of successful people Put all their eggs in one basket however a lot of people do and fail but you don't hear about them. Diversification minimizes risk which is what most investors need.
This is exactly one of the main topics covered in Seth Godin's book "The Dip".
Honestly, why would anyone strive to be mediocre instead of striving to become the best at what they do? You can only become the best by staying focused.
It's just common sense yet it is not always the direction most people go (even I myself have to remind myself sometimes about this fact).
Thanks for a good reminder article.
Excellent post. I've heard it so often I have to admit that I have believed it to some degree. Although on my quest to develop wealth I've obviously had to put all my eggs in one basket.
It is common "wisdom", but common people aren't wealthy.
Thanks for the insight!
I respect and totally appreciate your point.
I'd HIGHLY recommend taking the time to "understand" an asset class instead of hoping to succeed via diversification. Diversification shouldn't be used as replacement for study, research, due diligence. It's the easy way out and easy rarely generates any rewards in anything ... financial or otherwise.
If you don't understand one asset class you likely don't understand a basket of them.
My opinion of course, perhaps it's unrealistic to believe the average investor would spend the time do teach themselves but I would love to live in a world where it was true.
I think you need to diversify and try different things at first until you find what it is you’re passionate about but I do agree once you’ve found that spark it’s important to commit completely in order to fully achieve greatness in any area. I have also found and observed that once you do find something you’re passionate about you naturally want to focus all your attention and effort on it. However when it comes to fun and excitement personally I believe variety is the spice of life! Thanks for sharing your thoughts.
Tom, I wholeheartedly agree with you. What you talked about are for people who want to control their lives with the entrpreneurial spirit. In Richard Branson's 'Screw it, let's do it', he bought all his Virgins shares back from the public because he didn't want a board of committee that know nothing about music to run his Virgin. It was his call to not let down of his crew and people who have faith in him. He wanted to be 'the capitain of [his] ship and the master of [his] fate'.
If I owned 30 homes in the US several years ago, and had even 40% equity in all of them, then my decision to focus on Real Estate, and not diversify, might well have destroyed me as the US housing market collapsed. I know several people in the US that had bought several homes in 2003-2005 for $600K, only to see their home values plummet, and today still sell for less than $250K. There is risk in all investments, and while I agree that diversification is merely a tool to mitigate risk, it should be pointed out that no amount of focus and experience can prepare you for the collapse that occurs across the board at times. And no market is immune.
Why does everyone who want to scare the crap out of people about the uncertainties of real estate do it by making generalities about the recent US housing market collapse. There are more effective ways than that. Yes bad thing happened but that was localized to 5 specific states.
There are hundreds of millions of properties that never got affected. (remember we are talking about a market that is greater than 10 times the population of Canada)
1st lesson is don't try to get your information from the news. The news companies, just like any other company are in the business for profit, and bad news sells adds and make profit. Find out from real estate professionals in the specific market of interest if you want to find out what's really happening. Those lame news reports are mostly generalizations and propaganda and they have their own agenda.
This example is kind of bogus. You might have had a problem if you had 30 homes on the same street maybe, but if you would had 30 homes in different areas with 40% equity bringing in cash and meeting obligations, why would you sell even one of them? (unless you really really had to). Your biggest concern would be to worrying about your tenants loosing their jobs not the crash of the housing market. Many people who walked away from their homes had less than 10% on the high end to -5% equity (yes negative from the out-start) and what they fail to mention on the news is that many of them were investment properties. The news just harps on the small percent of very unfortunate primary resident home owners for dramatic effect. Don't get me wrong, it's a bad situation either way, but if you go by the numbers, the housing collapse got blamed for a lot more than it really did. It was a scapegoat for general bad practices by the banks and a bad economy which made the banksters get creative with mortgages in these specific markets that they could take advantages of loop-holes.
The crazy prices only started to get out of hand a few years before the crash so for you to be at 40%, typically you would have been long on the market by then so you wouldn't have paid those crazy prices anyway.
Sorry to sound ranty but I just get peeved when we generalize on negative outcomes.
Ok now i'm going back in my shell:
Don't let this poorly thought out example discourage you from investing in which-ever market makes the most sense to you at the time, just do your due diligence on the market before entering and your long-term strategy will work out every time.
People always have this saying about "time is money" I have learned that the more apt saying is "time is more important than money, because, if you have an abundance of time you can always make more more".
Some good comments made and I understand what you're point is. However, I think that the main point of diversification - risk mitigation - was not adequately addressed. With real estate you are leveraged. As such, the rewards and downside are both amplified. As Tony mentioned below, he owned 30 homes, but due to the housing market collapse, got burned bad. If you're strategy is to own rental properties for the long-term, then short term fluctuations in the housing market won't effect you as long as you have positive cashflow and aren't planning on selling your houses any time soon. But there are other factors that can effect you: interest rates, rental rates, natural disasters etc. You can easily make the arguments that rental rates (historically) don't go down and that there aren't going to be any dramatic increases in interest rates (it would cripple the economy). Insurance is a good way to hedge against natural disasters and fires - you can even cover your cashflow. So are the risks high compared to other investments (i.e. stocks)? Maybe not. But there are still risks, which are amplified because you're leveraged.
I'll use a recent example: The High River / Calgary Flood
Insurance companies don't cover flooding damage. And if you're insurance company doesn't cover the damage, they won't cover the cashflow. If you owned 30 homes in High River, and they all flooded, then you'd be defaulting on all your mortgages. This, of course, assumes that you don't get around it via sewer coverage or government assistance (taxpayers assistance - cough cough) - but you get the point.
I love real estate and personally think that the risk/return ratio is much more favourable than many other investments. I also agree that you don't become really good at something unless you focus on it - I got that point. But let's not forget the real reason for diversifying.