A Lesson From Warren Buffett about Diversification

            Warren Buffet once famously said, “Diversification is a protection against ignorance; it makes little sense for those who know what they’re doing.” There is a long-held belief that diversifying your investment portfolio is one of the keys to reducing unsystematic risk. However, is there such thing as over-diversification? The short answer is yes. Studies show that you do not need thousands of companies in your portfolio to effectively allocate your assets.

            The question then, is how do you eliminate business risk without over-diversifying my assets? The truth is, is that most of us do not understand how too properly analyze investment opportunities, and even so-called financial experts get it wrong. This can pose another problem.

            When running the Oracle of Omaha, Buffett would frequently take large stakes in companies as a way to influence their management. With this style of investing, Buffett was able to unlock value in undervalued assets, and learn everything about every company he owned.

            The way that CAPQ mitigates this risk is through our creation of the Tri-Party Venture Funds®. We do this by seeking out high-performing special Venture Partners, who have verifiable, historical, and consistent business models. The way we monitor these assets post-investment is through specialized Deal Teams, who become experts and are able to dive deep into our fund activity. We see this method as superior because it does not rely on diversification, rather specialization. This does not, however mean that the model is perfect, as any investment has the potential to lose money.

            In conclusion, knowing what you are investing in is your greatest hedge against loss. Simply diversifying your assets with thousands of companies having done no prior research, may hurt your portfolio in the long run as it can hinder overall performance.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top