Watch That Basket!

Is concentration the road to riches or to ruin?

It’s been said that diversification is the oldest rule in investing. “Don’t put all your eggs in one basket,” the old saw goes. I’ve written before how spreading out your money among different types of investments, different parts of the world, different industries, and even different advisors makes sense. That way, if disaster strikes, you have other assets to fall back upon.

Well not everyone agrees. Mark Twain put it most succinctly: “Put all your eggs in one basket, then watch that basket!” Concentrating a portfolio in one company or industry certainly can bring rewards. Andrew Carnegie is a great example: an immigrant from Scotland, he founded Carnegie Steel in Pittsburg, which he managed successfully until it was the largest industrial enterprise in the world. By some accounts, he originally penned Twain’s famous quote.

But unless the investor has a particular expertise, concentration is dangerous. A recent New York Times article profiled hedge fund manager Philip Falcone. His firm, Harbinger Capital, has 40% of its assets tied up in a 4G broadband satellite venture called LightSquared. If it works out, it could fuel outsized returns for some time. But Mr. Falcone has no special skill in data networks or satellite technology. Most of his wealth came from a winning bet against the sub-prime market in 2007. Much of his fame derives from his fashionable and iconoclastic wife, Lisa Marie.

Concentration makes sense when the investor has specialized knowledge or skill. But if you double down and it pays off, take your money off the table. Because if it’s just a gamble, the odds favor the house.

Douglas R. Tengdin, CFA
Chief Investment Officer
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