Diversification: What It Can't Do
- Nokia
- Nortel Networks
- Enron
- Oracle
- Broadcom
- Viacom
- Univision
- Charles Schwab
- Morgan Stanley
- Genentech
"Diversification isn't a pretty bird. Diversification doesn't make my heart skip a beat like a flock of goldfinches in July. Diversification, by design, is going to have winners and losers simultaneously. Diversification, by design, is never going to look pretty doing its job, because if your portfolio is all working in unison, swooping through the market in a beautiful glint of gold...well, you may be making money, but you sure aren't diversified."Diversification is undeniably effective, but it's effective like a rat is effective, wonderfully adapted to do pretty well in pretty much any possible environment without calling too much attention to itself. That's actually one of the rat's primary survival mechanisms. It's not flashy. It's not pretty. It's a freakin' rat."Diversification doesn't make us feel good like a winning value or growth investment makes us feel good, and as Maya Angelou so brilliantly said, how you make people feel is ALL they remember."I don't have an answer for the simple fact that diversification doesn't sing. I can't make a financial advisor's client feel good about diversification. I wish I could, because I would be...umm...a very rich man. But what I do know is that it's a mistake to gussie up diversification as something that it isn't. You can't sell diversification as a beautiful song bird. You have to be honest about what diversification can and can't do, not just for a portfolio's performance, but also for a portfolio's experience."The more years I spend in this business, the more I am convinced that how one lives with a portfolio, how one experiences its ups and downs over time, is more important for business success and business staying power than that portfolio's performance. And I'm not just talking about volatility, which is usually how we think about the path of a portfolio and its ups and downs. No, I'm talking about how a portfolio makes us feel. Most of us need those goldfinch moments of wonder and awe, even if they just last for a season, to feel good about our portfolios, and those are moments that diversification has a really hard time delivering."To every thing there is a season, and a time to every purpose under heaven. That holds for portfolio construction, too."