Why Diversify?

By  Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer

While reading Aesop’s fable about the Tortoise and the Hare to my children, I couldn’t help but see some parallels with investing and diversification. The hare represents investments concentrated in a few securities, while the tortoise represents a diversified approach.

Wealth is not easy to come by. While some people are lucky enough to win the lottery or inherit great wealth, the vast majority earn it through hard work, sacrifice, and a bit of luck. We often hear about the successes of people like Jeff Bezos, Elon Musk, and Warren Buffett, but there are many more who remain uncelebrated in their pursuits and efforts.

While adages like “don’t keep all your eggs in one basket” or analogies of farmers diversifying their crops are often used to explain the benefits of diversification, looking at the super wealthy provides a compelling understanding of these benefits. Another perspective is observing companies that failed to innovate or expand their product offerings.

It’s important to understand that having a concentration in a certain investment, idea, or business is not always a bad idea. Many of the super wealthy started with a single business, with their entire net worth tied to that one company. However, are these companies the same over time? The old saying “concentrate to create wealth, diversify to protect wealth” is evident in the actions of the super wealthy and the companies they are part of. The latter part of this saying also serves as a cautionary tale for companies that failed to heed this advice.

Elon Musk, for example, became wildly wealthy with his car company, Tesla. However, despite Tesla’s success, he has diversified his ventures into The Boeing Company, SpaceX, Starlink, and Neuralink. There are many reasons for this diversification, but maintaining and growing his wealth is certainly one of them. Similarly, Jeff Bezos gained extreme wealth with Amazon, which began by selling books but expanded to sell virtually everything. Beyond products, Amazon diversified into Web Services, Health Care, and physical stores. Amazon has also acquired at least 11 other companies, such as Ring, Zappos, IMDb, and MGM, as part of its diversification strategy. Additionally, Jeff Bezos owns Blue Origin, a competitor of SpaceX, and The Washington Post.

The Eastman Kodak company and Blockbuster are the two companies that serve as the cautionary tale of the lack of diversification. Both failed to diversify even when they were presented with new opportunities. In the case of Kodak, they created the technology that would later destroy them, the digital camera. This decision to stay concentrated was not made by unintelligent or irrational people. It was made by people that failed to understand that the only constant is change. Blockbuster famously eschewed mail services and streaming, sticking with one product delivery model and failing to diversify into other delivery methods.

Investors often feel that diversifying investments is akin to betting against themselves. Many investors seek one or two “hot” stocks to propel their wealth to new levels, but when the stock turns, they often regret not selling sooner. This leads them to chase the next “hot” stock, repeating the pattern. While diversification may not be the fastest way to build wealth, it is one of the most reliable ways to protect and grow it over the long term.

Warren Buffett, one of the most legendary investors of all time, has used a slow and steady approach to become one of the wealthiest people in the world. His companies invested gradually, maintained diversification, and have consistently succeeded in the investing race. Like the tortoise, diversification may be a slower strategy, but in the end, it’s not about where you start; it’s about where you finish.