Murray Stahl has been referenced here before. Google away on him and Horizon Kinetics and sit down for some long reads. A great writer he is not. But I have watched him come up with some absolutely stunning investment themes over 30 years. One or two would suffice for a plane if you paid attention and sized up.
From a recent conference call on one of his entities – we agree entirely.
The concept of diversification is a really important one, and it’s a good idea for people to be diversified. The question is, who gets to diversification? Should diversification be done by the client or should diversification be done by the manager. Now I can have a big position in security A and another manager might have a big position in security B and so on and so forth.
And you could find 10 or 15 or 20 managers and the client can engage 10 or 15 or 20 managers, and they would be diversified. That’s one way of doing it. And I think the sensible way of doing it for reasons I’ll explain momentarily. Alternative B, the other way of doing it is to say, well, when a given security does very well, I’d like to have a diversified portfolio at all times, I will sell it, always being mindful of tax consequences. So I’ll take advantage of the tax benefits if there are any of ETFs or some other type of this mentality to always be diversified.
And the problem is, and we have to be realistic about this. No one can be an expert in anything. So you’re putting the burden of diversification on the manager. What you’re basically saying is the manager has to be well versed in all of the economic sectors in all the industries. And speaking only for this manager, I can tell you this manager is not well versed in each and every industry. And as a general observation, I don’t think there’s any manager that’s well versed in each and every industry.
So if you want the manager to make use to the best purposes of what information and talent, with little information and talent that, that manager has, it seems to me that it’s more reasonable to run with an undiversified portfolio, which reflects the strengths and knowledge base of that manager and put the burden of diversification where I think it should be on the client.
