The Perils of Diversification

The more I study and observe success and failure in life, the more I realize how important focus is.  Our system encourages breadth over depth, trial over commitment, and activity over patience.  The average middle class kid spends her childhood engaging in a slew of extracurricular activities, from ballet to soccer to music to martial arts.  Kids are dragged from one activity to the next and become dizzied by the flurry of activity and wide ranging options available to them. Some activities are dropped for others and most are given up after partial pursuit.  Then, once school begins, she will spend the next 15 years taking general education courses, acquiring much knowledge which will soon be lost due to use-it-or-lose-it tendency, only to have to learn a new set of skills once she enters the workforce. Along the way, she will meet many people and devote substantial time to dozens of relationships.  In the end, however, only a handful will turn out to be truly meaningful.  She unfortunately will have spent too much time nurturing vacuous relationships, and too little time impacting the lives of those who truly love her. One of the most powerful things we can control in life is how we choose to spend our time, and we often spend too much time on activities which are unlikely to have a long term positive impact on us.

In short, we diversify too much.  Rather than engaging kids in 10 different activities, why not quickly narrow it down to 1 or 2 and have them dedicate substantial time to it?  Instead of exposing our youth to a torrent of general education courses, why not encourage them to specialize earlier in life?  Importantly, why not create a set of filters for the people we want to associate with early on and stay true to those filters as we move through life? Contrary to popular belief, much of life follows a power law distribution – a few things account for most of the value.  The one skill we have which we are more adept at than most others, the hobby or side pursuit (e.g. playing a musical instrument) which brings much meaning to our lives, and the spouse or the two key friends who help us through tough times and make us a better human being.

There’s no hard and fast rule and there certainly are examples of well rounded individuals achieving singularity in their lives. It’s in our very nature to explore, learn, and experience as many things as we possibly can.  Charlie Munger espouses worldly wisdom and learning the basic tenets from all the academic disciplines. I’m not suggesting we tune out the knowledge of the world, I’m only suggesting we develop better filters so we can spend more time pursuing high impact activities. We should spend some time learning the basic principles from the various academic disciplines for it will make us better thinkers and decision makers; these principles, however, can be learned and internalized through focused effort, and don’t require 15 years of general education in the format provided by our school system. These concepts should be presented as a broader thinking toolkit, and not learned rote for the sake of passing exams.

From my observations, however, it’s the people who choose a very few things to focus on and pursue it with rigor, determination, and commitment, that are able to make the most of their potential and have the highest level of satisfaction in life.  What they are able to do better than anyone else is say “no”, tune out the world, and engage whole heartedly in deliberate practice of the craft they are trying to master. Rather than trying to do a little bit of a lot, we should be doing a lot of a little. It’s more likely to give us a sense of accomplishment at the end of our lives.

I believe this theory extends to portfolio management as well.  Most portfolios also follow a power law.  There just isn’t enough time nor are there enough opportunities in the market to develop 15-20 unique insights in a given year.  We’re lucky if we are able to find more than a few.  What has distinguished the great money managers from average ones is their willingness to bet big when the odds are in their favor.

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