Billionaires Say You Shouldn’t Diversify Your Investments, Here’s Why…
“Diversification is for idiots.” That’s what Mark Cuban says. Warren Buffett and Charlie Munger aren’t big into diversifying either. And Elon Musk’s $72,525,136,387 stock portfolio consists of two positions: Tesla and Twitter.
Why do billionaires generally dislike diversification?
And should you build a super-concentrated portfolio too?
Here’s the truth…
Two Billion-Dollar Advantages
When you buy a stock, you’re purchasing it through a major market exchange. Any information you have on the business generally comes second-hand. Maybe from YouTube or a financial website. But, you aren’t sitting down and to have lunch with the CEO.
When billionaires buy stocks, they’re able to meet with management and analysis proprietary information.
In many of their old interviews, investors like Warren Buffett and Carl Icahn will talk about going to a company’s headquarters or meeting with executives.
If there was a company where you could call the CEO whenever the stock dipped, you’d probably go “all-in” as well.
Secondly, many billionaires are not buying common stocks. They’re acquiring special, “preferred shares” that pay a guaranteed dividend. Or, these shares give holders first rights to compensation in the event that the company goes bankrupt.
When Warren Buffett invested in Occidental Petroleum, he bought 100,000 preferred shares. These were required to pay 8% in annual dividends.
After the company slashed its payments to regular shareholders in 2020, it was still rewarding Buffett (albeit with a more stock shares as the dividend, not pure cash).
Preferred stock typically lowers investment risk, since it gives the holder special privileges.
If you had to choose between buying the S&P 500 or investing with three different businesses where you personally knew the owners and were legally guaranteed a specific return, which would you pick?
A lot of super-concentrated portfolios have advantages that ordinary shareholders can’t access.
Remember this the next time a billionaire investor says diversifying is bad.
Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.