The Problem with Investment Diversification

Sep 18, 2023 | Finconomics 101, No Bull Economics

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Every investment advisor and business student knows that portfolio diversification is key to wealth building. Show me an investor who can beat the S&P 500 Index by buying a few handpicked stocks and I will show you a hedge fund manager in the making. However, there is a huge problem with this strategy that no one is talking about.

Commentary

  • How does Anheuser Busch and Target make such huge marketing miscues that wipe out billions in their market cap and no one gets fired at the top?
  • How do ESG mandates get codified in big corporations without any preceding evidence that they will drive profits? How about evidence that they will not at least drive losses?
  • The simple answer is that the largest publicly traded companies are owned by investment funds that have pooled together funds from individuals that are far, far removed from influencing the operational decisions of the companies in which they are invested in.
  • In other words, there are no shareholders to hold management teams accountable. Instead, management teams and board of directors have become accountable to portfolio managers who don’t have the time or inclination to exercise their delegated authority over their well-diversified investment portfolios that may span hundreds of companies. 
  • Sure, there are a few activist investment managers who will push ESG or other social agendas, but there are precious few who will hold management teams accountable to innovate and drive ROI. We need more of this.    
NoBull’s fantasy stock game which is under development is currently being run internally. Notably, our student intern (John) is leading the pack with 10 stocks that are performing in line with the S&P. We may have a difficult time recruiting him away from the hedge funds. It’s a good thing Wally already has a job with Restaurant Research!!
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