I was having a conversation with a friend recently about diversification. He or she was arguing that my portfolio is overly concentrated, and thus risky.
Clearly, as my portfolio indicates, I disagree.
I find that diversification is often oversimplified and overemphasized. People take it to mean that owning more stocks reduces risk. But there’s tons of nuance.
For example, some people own a lot of different companies, but all in the same sector. Is that diversification?
Further, individual companies can be diversified in and of themselves. Take Salesforce, my largest holding. Most people know it for customer relationship management (CRM) software, but that segment makes up less than 30% of revenue. So yes, it’s one company, but with a diversified revenue mix, driven largely by acquisition. Does that count?
Taken to the extreme, consider Constellation Software, another favorite holding of mine. The company follows a holding company structure, similar to Berkshire Hathaway, but purely dedicated to vertical software businesses. Since being founded in 1995, they’ve acquired over 500 companies. If that’s not diversified, I don’t know what is!
In investing and in life, concepts are rarely black or white. The interesting (and profitable) bits often lie somewhere in the grey.