Even if Boeing stock went to zero, both of our portfolios would still be outperforming. That’s the value of having a diversified portfolio.
Ben Strubel’s letter to investors for the month of March 2019, titled, “The Boeing Crashes Show The Benefits Of Diversification.”
User:Acefitt [CC BY-SA 4.0], via Wikimedia CommonsThere are different approaches to diversification in the investment world. One school of thought is that diversification is really “de-worse-ification.” The thought is that all your money should be put in your best investment ideas. Why invest in your 15th best, 20th best, or even 50th best idea? You can find investors and fund managers who’ve used this approach and have lots of success stories.
Q4 hedge fund letters, conference, scoops etc
What you don’t hear about is how this approach can be dangerous. What happens if your best idea turns out to be wrong? Investors don’t usually publicize their failures, but that doesn’t mean there aren’t any. I’ve known experienced, Ivy League-educated managers who apprenticed under well-known, well-respected, successful managers who essentially blew up their fund because they were overly concentrated. Some popular mutual funds with great long-term track records have followed the “best idea only” school of thought. They have put almost a third of their fund in one stock or group of similar stocks and have lost money over the past five years while the market was up significantly!
No one can accurately predict the future. Sometimes there are many warning signs about a big stock that blows up. General Electric has had well-publicized problems for years. Short sellers and critical journalists (sadly, there aren’t many left these days) raised serious questions about companies like Enron and Valeant Pharmaceuticals before they blew up. Other times serious things occur that no one could have foreseen or investors could never know.
Clients depend on us to shepherd and grow their money for retirement. No one person or group of people is omniscient. We’d rather err on the side of caution and over-diversification (if there is such a thing).
Take the latest news with Boeing, for example. The modern commercial passenger aviation industry is incredibly safe. It’s highly unlikely anyone could have predicted that two 737 Max jets would crash only a few months apart under similar circumstances. (Yes, we are aware of some of the tertiary issues regarding pilot complaints and the wisdom of 737 Max designs.
