Thomas Brown advises against portfolio diversification
James Glassman provides a review of “My Ten Rules” by Thomas K. Brown of Second Curve Capital. Apparently, these two are motivated by The Global-Investor Book of Investing Rules by Philip Jenks and Stephen Eckett.
The passage in all this that has me wondering if I should even look at the The Global-Investor Book of Investing Rules is as follows:
Concentrate your holdings. Brown argues that “at any given time it’s impossible to have a true knowledge advantage — the investor’s indispensable edge — in more than a couple [of] handfuls of companies. If you diversify away from those few, you’re only diluting your results. What’s the point of that?…We have had as much as 25 percent of our partners’ equity in one position. That will make for highly volatile near-term results. But if you’re a long-term investor, who cares? It will also help assure sizable long-term outperformance.” Remember, however, that academic research shows that while concentrated mutual funds beat diversified funds, focused portfolios carry higher volatility, or risk.
Sure Glassman writes the diversification is important, but wasn’t that part of the received wisdom over 50 years ago when Harry published “Portfolio Selection” in the Journal of Finance?