So before you start bashing Mark Cuban for stating that diversification is for idiots, you need to hear him out because there are some solid reasons for his claims. And he’s actually been backed up from no other than Warren Buffett who’s been quoted saying “Diversification is a protection against ignorance.” But why is that?
You can’t diversify enough to know what you’re doing
So as an individual investor you can’t really follow a diversified portfolio closely enough to know if each one specifically is a good investment, which is why most people leave it to a financial planner to do the job for them, and I’ll tell you why that’s a horrible idea in a minute.
So Mark Cuban’s approach is different to the traditional diversification and unless he knows something specific where the margins are in his favor he’ll simply keep it in cash. And holding a substantial part of your wealth in cash isn’t necessarily common but it’s a very valid investment strategy as it enables you to take advantage of unexpected market crashes and other business opportunities, which is something he’s done many times. In 2009 he did his homework and bought mortgage backed securities when their value was crushed as well as investing in Australian bonds as a way of playing China. This at a time when most people had huge investments in regular diversified portfolios without any cash. A portfolio like that is great and all when the market is booming, but once the market crashes you’re screwed.
However Mark Cuban’s approach requires you to do the homework and really read into what you invest in, which will take a whole lot of time but if you do it well can pay off greatly. And what Mark Cuban and Warren Buffett writes off about traditional diversification is that you’re not really diversified at all. Even though you might put your eggs in different baskets and have several different investments in different markets, they’re all paper-assets. In the same paper-asset basket. It doesn’t matter how well this diversified portfolio is doing because as I stated before if or when the market crashes, your whole diversified paper-asset basket will do so too.
Robert Kiyosaki explains this well through his rich dad poor dad brand where he talks about the four asset classes that you should invest in if you want to truly diversify your investments. They are owning a business, having real estate that create cash flow, commodities and lastly also paper assets.
- Business: Owning a business that creates cash flow.
- Real estate: Having investment properties that create cash flow.
- Paper assets: Trading paper assets with technical investments.
- Commodities: Hedging against markets with commodities such as gold, silver, oil, and more.
As a diversified investor you should invest in all of these asset classes and be specialized in one or two of them. Most people only invest in the paper assets without much knowledge about what they invest in and leave it to the financial planner.
So when Mark Cuban states that asset management and diversification is for idiots (clip), he means it in the traditional sense of paper-asset diversification that a financial planner would set up for you in a portfolio. The financial planners that works for the bank can be ruthless and most of them care only to sell you their products, charge you fees, take your money to benefits themselves.
And just to put things into perspective, today it takes 30 days to become a financial planner and about 1,5 years to become a massage therapist. The money you’re trusting a financial planner to invest and diversify for the rest of your life could be in the hands of someone who has no experience what so ever. But you need almost two years of practice before you can squeeze someone’s calfs as a massage therapist.
In most countries you can legitimately advise someone to buy a multimillion dollar property and make tens and even hundreds of thousands of dollars in commission in this one transaction. You’re not required to have any educational qualifications, not even complete year 12 in school to earn the title financial planner. So you think these people will advise you in your best interest or in their own best interest?
Lets use Mark Cuban as an example, I mean look at the guy he’s one of the most diversified people there is. He’s invested in a bunch of companies, mostly through shark tank but also outside of that. He’s got 6 properties only in Northwest Highway and Preston Road and is an avid investor in paper assets as he takes advantage of unexpected opportunities in the market.
And you can become an investor in all of these asset classes even if you don’t have a lot of money. If you like most people don’t have enough money to buy real estate you can invest in properties through crowdfunding and earn around 10 % interest from it. Some popular sites that offers this kind of investment is Peerstreet, crowdstreet and fund that flip amongst others. And another good little tip is to own your home rather than renting it.
When it comes to paper-assets you can follow Warren Buffett’s advice to invest 90 % in a low cost S&P 500 index fund and 10 % in short-term government bonds. As simple as that.
And having your own business has never been easier than today. I mean you don’t need to have money to make money and you can start building passive income streams today without investing any money whatsoever, as long as you’re ready to put the work and effort into it. If you want some ideas on how to build passive income streams I’ve made a video on 10 ways to create passive income without investing money that you can check out.
There are loads of e commerce business opportunities to take advantage of that will have an some costs to operate but will in turn generate great profits, such as drop shipping and FBA by Amazon and many more.
So this is the reason for why Mark Cuban says that asset allocation and diversification is for idiots, so if you haven’t already make an effort into truly diversifying your investments to avoid getting screwed over if the market crashes.