Diversification: Why It’s A Stupid Strategy (For Most People)

 

Gloria Heafy GoodPlace

Long time GoodPlace readers will know that I am a big believer in finding good mentors. In fact, I attribute everything (good) that I know today come from a few ‘elders’ in my industry who I really look up to. Getting good mentors is pretty easy (at least for me) because of two things: (1) successful people are successful because they are not selfish dicks, and (2) I try to give back as much as I can. So, all I needed to do is to (1) ask, and (2) give back. If I can do it, anyone can.

(And as for those who emailed in to ask who my mentors are exactly – well, I’ve done enough lame name dropping already in this blog. My mentors shall stay anonymous because I don’t want them to be bludgeoned with mentorship requests once they get outed. But if you still want names, there’s nothing that you can’t find on Google nowadays).

And so last Sunday I was over to spend time with my Mentor (with a capital M) and mowed his lawn (remember I said that I tried to give back!). His often contrarian thoughts about business and life were always very entertaining and enlightening at the same time.

He pointed at this Bruce Lee calligraphy painting on his wall in his reading room. “Khai Yin, read what it says, and tell me what you think.”

Bruce Lee quotation

Not the actual painting, but close.

I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times,” I had struggled to read the calligraphy given my uber poor Chinese vocabulary. “Well, I guess today’s lesson will be on focus and perseverance. Keep working on one thing until complete mastery is achieved. Stop getting distracted by new and shiny things, and keep your eye on the ball?” I had offered.

He frowned a little. “Khai Yin, what you said is what I’d call a truism“.

“How so?”

“Truisms are stuff that sounds true, or maybe even is true, but has almost zero practicality in real life. You don’t need me to teach you about ‘focus’, ‘perseverance’ and that kind of fluff. You’re here to learn something practical, something you can take and run with, something you will immediately benefit from if you take action this Monday morning.”

I took out my trusty notepad. The lesson had begun.

“This Bruce Lee quote has been my core property investment strategy for the past thirty years. Believe me, trends come and go, and you can bet that I’ve seen them all. I don’t follow trends. I keep myself grounded with timeless principles, and I want you to do the same.”

I nodded.

“In the context of property investment, this quote is very relevant when you think about diversification. When you’re building up your portfolio, you are always tempted to cast your net far and wide. If your KLCC condo is struggling to make yield, you can fall back on your scruffy shop lots in Puchong that are easy to rent out. Makes sense, doesn’t it?”

I nodded again, but knowing him, I waited patiently for the inevitable “twist” in his story.

Will you put all your eggs in one basket?

Will you put all your eggs in one basket?

“You’ve told this to me before,” I said. “That the concept of diversification is often misunderstood. All I know is that you shouldn’t put all your eggs in one basket, that’s all.”

He chucked. “Really? Remember all the meetings you’ve had with my inner circle so far. If there’s one skill that you must acquire, it’s the ability to move away from the herd.”

Warren Buffett GoodPlace

The Sage knows it best

“So you’re saying that diversification is… wrong?”

The Mentor smiled. “It’s a valid strategy to some people, but for most, it’s downright stupid.”

Diversifying Your Portfolio? Don’t Be Stupid

I had come to know the Mentor as a well-mannered man with a stoic facade who wouldn’t have anything nasty to say about anyone. As such, the uttering of a word like “stupid” was somewhat out of character for him, and it did startle me quite a bit.

“This is what usually happens. You make your first two or three KL condo units in the sub sale market with the help of a good agent, and you make decent returns. You start to gain tremendous experience in city condominiums, and learn little nuances of this niche which give you unfair advantage, like knowing how to make superior rental yield despite oversaturation problems.

“And then you attend a Guru seminar where you’re told that you should diversify. Don’t put all your eggs in one basket, remember? And so you start buying shop houses in Rawang, you get into student rentals in Cyberjaya and you jump into the auction market not knowing that it’s infested by sharks. And then you lose your shirt.”

property gurus are scammers

I could hear the Mentor’s deep frustration in his voice. Maybe he had made this mistake earlier on in his career? I didn’t know.

“You see, Khai Yin, virtually everyone I know who is good at this property investment game started off with one thing, and one thing only. You know Munirah? She goes for cash generating properties only. She doesn’t care about capital yield; cash flow property is her specialization. Ari, as you know, is the luxury condominium king. My old friend Roger had always been a specialist in student rentals before he accumulated enough dough to do private equity deals.”

I nodded. Munirah, Ari and Roger were the Mentor’s buddies in his inner circle, and I had had the opportunity to hang out with them quite a number of times for the past few months. Indeed, many of the blog posts here at GoodPlace had been based on my conversations with them. For example, a drunken night out with Ari on Jalan P Ramlee (incidentally five minutes by foot from where he lived) resulted in this guide.

“Any exceptions to this rule?”

“Well,” he answered, “If you’re truly rich, then you have earned your right to diversify. But you’re not rich, and I bet that most of your blog readers are not terribly wealthy themselves. Here’s the truth: you can never be wealthy unless you become the very best in a small area first. Most people don’t do this. They try anything and everything under the sun once, and wonder why they are still dirt poor.”

“So here’s the rule of thumb. To make it in property investment, do not diversify until you have made your first $10,000,000.”

Non-Diversification: The Key To Mastery

If you’ve been reading GoodPlace for a good while, you’ll notice that I almost never recommend “investment” books in my blog. There’s a good reason for this.

I think that property Gurudom does more harm than good to the regular Joe homebuyer. You see, I was from the “Internet marketing” industry (I still cringe whenever I think back) and so I am familiar the modus operandi of these Gurus. Here’s how they work in case they don’t know – they write “books” which are in reality just glorified sales brochures to entice you to spend money on more books, expensive DVD sets, weekend seminars and “VIP Platinum Coaching” sessions.

These snake oil peddlers want you to believe that diversification is good for you – so that they can sell you even more crap down the road. You know the Prosperous Papa Pokai Papa (make your own lame analogy) book? Once you’ve bought into its diversification ideas, don’t find it surprising to suddenly feel that you have to buy their ENTIRE catalogue of books to feed into your own frenzy.

So the next time you see a “FREE $997 SEMINAR TICKET INSIDE” sticker on the book cover then you know what the deal is. 😉

Creepy Wonka meme!

Guru bashing aside: remember that once you’ve decided on where you want to play, then anything that doesn’t help you get ahead IN YOUR CHOSEN NICHE is just noise. Do what Bruce Lee had said: practice 10,000 times on one kick, and you’ll be a real contender.

Finally: don’t just dream about success – do something, anything that will get you just an inch closer to where you want to be right now. Do it.

Key Takeaway: Pick a niche, and stick to it until you become unbeatable at that niche. Diversifying before you accumulate substantial wealth is foolish.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. Hi Khai Yin,

    This is a really interesting article.

    Having read a couple of investment books, this is the first perspective I have came across that does not support investment diversification from the start. I would love to understand this better and I really hope you can enlighten me.

    1) Diversification is done for risk mitigation. If diversification should only be done when I am established, how can I mitigate my risk when I am still at the novice-intermediate stage?
    For eg: If I were to immerse in Luxury Property and suddenly, there’s a new regulation which increases the minimum purchase price of a luxury property. This regulation affects my investments. What could I have done to mitigate these kinds of risks?

    2) Why RM10,000,000 ? Is there any particular reason for this number?

    Thanks in advance for your response, Khai Yin! =)

    • Hi Carmen & Khai Yin,

      Great to ve read ur article & comment on diversification.

      In my opinion, we need to diversify within our means and always make informed decisions.

      Diversification itself can be defined differently by different people. Eg. Diversifying in buying residential porperties: highrise, lowrise; or in buying residential, commercial, or industrial; or in buying land; or in buying local, other states, foreign.

      Just sharing.

      Cheers.

    • Hi,

      I am not Khai Yin, but I agree with him. Ever heard of focus on less to do more? That is basically this. Diversifying is BS, unless you can afford a team that can analyzes every market you want to diversify in. Most people who diversify do it out of necessity, not because they want to. They are usually so rich that their investments can move an entire market up or down. They diversify to protect themselves, not to end up being the only investor in a certain market, and lose all their wealth.

      Besides that usually diversification means less money, because the more you diversify, the more your investment follows the entire market. So, unless that is your goal, you shouldn’t diversify. Most people aren’t rich enough to diversify. But most of these investment books are based on billionaires who are forced to diversify. Even Warren Buffett is anti-diversification. This is an actual quote from him “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” But unfortunately guys like him can’t invest their entire wealth in just one company, and that is why they are “forced” to spread their wealth over multiple companies. If Warren Buffett could put his entire wealth in Coca-Cola stock (or just a handful of stocks) I’m pretty sure that he would.

  2. Makes a lot of sense! As it is, most of us do not have enough firepower even to do just one thing well. Diversification would only weaken our focus further. I think in any investment, or business, the initial period is always tough. And then one day you find that you have achieved a sort of critical mass, and bingo, it becomes much smoother sailing from that point on. By spreading ourselves thin, how can we ever hope to achieve the critical mass.

    You know the saying “divided and conquer”. Diversify too early, and we are actually dividing ourselves …

  3. I agree with this article. Many would argue that putting all eggs in one basket is risky but on the flip-side, putting eggs in several baskets necessitate for more efforts to monitor all the baskets. In theory it may work but in practise I see many times where not all baskets receive the same attention. Only a handful baskets (the most 2) get the fullest attention. The lesser value generator baskets are sidelined and receive less attention. Thus, defeating the pupose of diversifying a portfolio.

    Rather than diversifying in the early stage why not put some money for a safety net and any adverse eventualities?

  4. Another way to see this is, if you are investing in landed houses, shoplots, condo, apartments etc but only in a specific area like Subang or Puchong, where ever – to me that is not diversifying. You can still invest in many types of real property but only in an area that you are very good and familiar at. You are the expert in that area. You know the people (grassroots) security guards, the chicken rice seller etc. You know immediately if there is a shoplot/etc that is coming to the market. You know the good deals first before it reaches the internet.

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