Investing Then and Now
Chapter 9
Diversification Won’t Make You Rich
There is a popular myth in personal finance today that the secret to getting rich is diversifying investments early and often.
That is historically false. Diversification is important, but it comes last, not first.
Charles Blunt1 made a solid living installing new fabric onto old chairs for rich clients. Then, in the late 1600s, he saw an opportunity. His customers were hot for the newly created stock market, but not always able to handle trading. Blunt figured out how to trade stocks for them, charged fees, and his side hustle soon pulled down twenty times his old salary. As he aged, he slowly moved the newfound wealth into a wide array of investments: land, loans, stocks, and government bonds. Having risked the long climb, he was both wealthy and stable. He took every step in the right order. First, he limited himself to something he understood: making rich customers happy. Next, he concentrated all his efforts on being the best broker in the business for three decades. Finally, he spread his new wealth around to keep it safe. Limitation. Concentration. Diversification. Charles Blunt won the financial game by playing it the smart way.
Charles Blunt slit his own throat in 1720, financially ruined. Tempted by even greater wealth, he went backward, abandoning diversification by putting everything he had into a single stock called the South Sea Company. It went bust. His climb, and his demise, embody the core lessons of building wealth ever since. Go Ahead has an order: limit your actions to where you can win, concentrate your efforts where the payout is greatest, then diversify your gains so you walk off the field a winner. Getting the order right—limitation, concentration, then diversification—matters.
Advice today often starts with diversification, especially telling people to invest in a broad stock index as young as possible. This is historically backward. It mistakes what the rich have with what the rich did to have it. In rock climbing, the belay breaks your fall, but you don’t climb a belay. You climb a mountain. Focused energy takes you up. Diversification is for not tumbling back down.
Diversification of effort, of attention, and of assets was vital to surviving before capitalism, but dangerous inside it. Our modern economy is barely 300 years old, young by we-once-had-stegosaurus standards. Lots of ancient advice about spreading things around appeared in witticism and wisdom. “Don’t put all your eggs in one basket” was built for a world where “ahead” wasn’t a place chickens—or everyday people—went. Falling out of baskets or down social ladders was. All those time-worn instincts backfired in a world where getting ahead was possible.
Diversifying effort was, and often still is, seen as admirable. Not hiring help served as a point of pride for many people, especially the poor. Why pay for work you could do yourself? It never occurred to anyone that they were DIY-ing it wrong. This was such an acute problem that the president of Harvard gave a speech about it2 in, of all places, an 1819 cattle show. His point? Hire more help. Farms were businesses. They should run as such. Stop fixing every little thing by yourself just because you could. The businessman-farmer with hired hands was free to concentrate on the big picture of new opportunities.
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Success starts with limitation, and limiting yourself sounds boring. Being interested in many things makes for great pub chatter, but weak returns. The earliest success manuals and business maxims universally focused on Americans’ bad habit of spreading efforts and attention too thin. Being good at one thing was hard enough. The quickest way to lose money was to try mastering two.
Circus mogul P. T. Barnum described a common experience then and now in his most famous speech, The Art of Money Getting. Fortunes came from specialty, be it drilling teeth or oil. When a successful person hears of a way to double or triple their money doing literally anything other than their day job, they flatter themselves that since they are successful in one arena, they’ll be good in this, too. When the money is gone, “he learns what he ought to have known at the first . . . in a business which he doesn’t understand, he is like Samson when shorn of his locks . . . he becomes like other men.”3
Variety may be the spice of life, but it is the death of successful businesses and investing. An 1840s training guide for young merchants explained that those who indulged too many interests, “passing from business to business with versatile and unfinished eagerness,” quickly fell behind the diligent trader, worker, or investor who became great at one thing. “Perpetually busy, harassed by numerous occupations, they fly from one to another, and though always employed, effect nothing.”4 This wasn’t idle advice from old men. The credit records of early U.S. businesses are littered with comments of small timers trying to do too many things who went broke. A New Jersey grocer’s lone historical record is found in his nineteenth-century credit bureau report. “Failed. Went too far, too many irons.”5 Limitation saved financial lives.
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Next, concentration paved the road up.
Andrew Carnegie, who knew a thing or two about climbing from the bottom to the top, encouraged young entrepreneurs to “Concentrate your energy, thought, and capital exclusively upon the business in which you are engaged.” People who failed “scattered their capital, which means that they have scattered their brains also. They have investments in this, or that, or the other, here, there, and everywhere. ‘Don’t put your eggs in one basket’ is all wrong. I tell you put all your eggs in one basket, and then watch that basket.”6
Of the great nineteenth-, twentieth-, and twenty-first-century investors, not a single one spread small bets around. Each took calculated, careful, but nonetheless substantial risks concentrating their efforts in just a handful of investments. Warren Buffett didn’t get rich diversifying, and said so. Some of the rich people you know may have tried different things, but they stuck with the one that worked.
Limit, Concentrate, then Diversify
Limitation is knowing what to ignore, and ignoring is a tremendous superpower. It must come first in the investment birth order because it lets you concentrate on the right things. Concentration is how you get the big wins. Diversification protects what you made.
When you carry books in public, people invariably ask what you’re reading. This has led to countless exchanges on money with complete strangers, since nearly every book I’ve read for over a decade is about investment history.
People will tell strangers anything. Several confessed, proudly, to bankruptcy fraud. One invested exclusively in Pokémon cards. The saddest was a waitress who asked if I knew about crypto. A little, I said. She promptly sat down and poured out a story of putting her entire college fund, left by her dead mother, into cryptocurrencies so she would make her family rich. The prices promptly crashed during her freshman year. So here she was, working to save and go back to school, crying with a stranger who wasn’t sure if asking for a refill was rude.
I looked up her coins recently. They bounced back to where she bought them, but it took four years to break even. She could have had her degree by then. Failure to limit yourself can hold you back.
Limitation is how you know what to concentrate on. The best limitations have two characteristics. First, they involve skill. Are you good at this, or can you become great over time? Even better if you choose to be great at something others can’t or won’t do. The best ways forward are the ones where you get some say in where the path goes, and the fewer people on the path the faster you’ll get somewhere. Ignore everything else. Second, ignore paths that don’t lead somewhere much better than where you are now. You want optionality: a huge upside with a very defined downside. Building an online store, starting a business you’ve seen from the inside, earning an in-demand credential, trying a commissioned sales job, or whatever strikes you as worth the risk of time and energy can have extremely high payouts. The costs, what you stand to lose in time and money, should be easy to measure. If the efforts are high but the potential payouts pedestrian, ignore those.
Then comes concentration. This is how nearly every person who got rich in American history did it. Every financial guru telling people the path to wealth is through regular, diversified investments in the stock market did not make their own wealth that way: they built a business worth millions, had high income jobs for Wall Street firms, or made money selling their advice. That doesn’t make them unique, it makes them normal. Concentration is the path to Go Ahead.
Of the Famine Irish who fled to New York, those able to Go Ahead usually focused on building small businesses. Hugh Collender7 and Michael Phelan were good at billiards, so they made it their trade in the 1850s. Their perfectionism for bumper rails garnered their tables a great reputation and, eventually, a high-profile buyer in President U.S. Grant. Their fame spread, and after Phelan died, Collender sold to the Brunswick Company, diversified his assets, and retired worth $1 million (over $30 million today). He wasn’t alone. Of the poorest Famine Irish to arrive in New York, fully one in five ended their lives as a business owner. Such concentration still works today: the number of American small-business owners worth $10 million or more8 has doubled in just the past twenty years. The majority of the wealthiest Americans’ income, according to IRS data, comes from owning a company that offers such oddly unsexy services as fast food franchises, carwashes, parts distribution, and carpet removal.
Once you reach bigger paydays, protect what you’ve earned. This is when you diversify. Concentration has an expiration date. You shouldn’t keep risking forever. I have a pet theory that Elon Musk will die broke because the man hasn’t met a risk he isn’t willing to take. He may continue to defy gravity, but for mere mortals, the roulette ball eventually hits the other color. The chance that Bill Gates goes broke, though, is essentially 0. When he retired, he sold down his 49 percent stake in Microsoft to 1 percent, diversifying into a host of other investments. Win the game, then diversify.
If Charles Blunt had learned this lesson, he wouldn’t have met his sad demise. He tried to go even bigger toward the end of life, when there wasn’t time left to recover. As Sylvia Porter, the grand dame of personal finance, admonished investors, no one “ever jumped out a window because they owned United States Government Bonds.”9 You won’t get rich on them, but you won’t go broke, either.
Limitation. Concentration. Diversification. In that order.