Kerkorian On Diversification

In this weekend's article on Kirk Kerkorian, the Wall Street Journal quoted him on the topic of diversification as saying,

"Diversification is for people who aren't sure about what they are doing."

This caught my attention, because my portfolio periodically becomes concentrated in companies in certain sectors, causing consternation among potential investors.

For example, several years ago, as the housing market was in a healthy growth mode, I held a significant percentage of the portfolio in several home builders and financing institutions. While discussing the strategy with several representatives of investing institutions, I was criticized for this concentration. My explanation that was unlikely to earn above-market returns simply through diversification fell on deaf ears. As Kerkorian observes, these people, not being investors themselves, but merely analysts, were more interested in risk avoidance than actually earning returns.

A similar situation exists when hedge funds engage in long/short allocations. That is, they may only be 70% long, and 30% short, in order to, they believe, mitigate risks of extreme losses. I have had discussions with people at such funds, who have told me that any all-long or all-short positions add no value over that of a mutual fund. To them, apparently, the value of a 'hedge' fund is in the hedging.

In reality, though, the proof is in the performance. If one is confident that a market environment is supportive of an all-long position for one's strategy, then one should be long. In that respect, I feel that Kerkorian's view is correct. Managers often hedge because they are simply unsure whether to be long, or short.

I think that sometimes, people can make a situation far more complicated than it need be. Kerkorian's remark reminds us that it's not always necessary to diversify. There are times when you have a specific objective, knowledge of a situation, and are able to reap profits because of your concentrated efforts, rather than diluting them via diversification.