Diversity vs Concentration

Go all in on one thing, or go for a portfolio of small bets?

I run a portfolio of products, ala the portfolio of small bets approach.

The whole idea is that diversity mitigates risk. A portfolio prevents the classic all eggs in one basket problem. But some folks hate it. They prefer to focus and go all in on one thing. They prefer concentration as an approach.

I’m on board having focus, just not too much.

Focusing on just one thing feels like it’s too much. 1 is just 1 away from 0. If a black swan event occurs—Apple bans you from the App Store for no reason, a fire burns down your store and all your inventory, or a massive competitor shows up—you lose.

But as much as I love diversity as a hedge against risks like this, there’s also such a thing as too much diversity.

“The more positions you have, the more average you are.” – Bruce Berkowitz
“You can diversify yourself into mediocrity.” – John Neff
“Diversification covers up ignorance.” – Bill Ackman

Source: mastersinvest.com

It’s really a spectrum, isn’t it? Concentration on one end (with a minimum of 1 big bet), and diversity on the other end (with maybe hundreds of small bets). The trick is to find somewhere in between:

“Diversification may preserve wealth, but concentration builds wealth.” – Warren Buffet

Don’t have just one thing. but don’t spread yourself too thin.

How thin is thin - it’s entirely up to your capacity.

Have a couple of bets to start. Try, experiment, market, push them. Prioritize the 1-2 that have potential, but keep the rest going, or try new ones, or spin off from the good ones. Have concentration and diversification.

You can have both, but in varying degrees as you progress.

---