Diversification "makes very little sense for anyone that knows what they’re doing" 🤨
Buffett convinces millions of people that they can successfully pick stocks. Sigh.
What I’m reading…
AQR: The Impact of Liquidation Taxes on the Lifecycle Benefits of Tax-Aware Long-Short Strategies
Eaton Vance: Tax Forward 365® Monthly Planner
Eaton Vance: Concentrated Stock Positions: Know The Risks
Franklin Templeton Adds Managed Options Strategies to Canvas
Morningstar (vid): Covered calls belong in tax-exempt accounts
📌 Betterment (coming soon): Tax Alpha Insider interviews Mychal Campos (Head of Investing, Betterment) on a hyper-niche tax-loss harvesting rule for ETFs
From Concentrated Stock Positions: Know The Risks, a few cool charts.
Some people still don’t believe the risk, though.
“This time is different,” and “tech is different” are recent arguments I’ve heard.
The Buffett mirror
At yesterday’s podcast taping about holding too much company stock (recording below), someone dropped roughly the following quote into the chat:
“You know, we think diversification is—as practiced generally—makes very little sense for anyone that knows what they’re doing”
Buffett is folksy and awesome, but he’s a sphynx, or maybe a mirror.
If you want to take big swings on individual stocks, he’ll tell you it’s possible with a little hard work.
If you’re dogmatic about the efficient market hypothesis (or too busy to deeply research companies), then his recommendation to buy a low-cost S&P 500 ETF will likely resonate.
The practical result of these competing philosophies coming from the same man is that there’s always some upfront debate about whether too much stock concentration is a bad thing.
There’s a set of investors who think they know what “deeply” means and believe they have the skill to carry it out.
This sounds like a bit of overconfidence of the Dunning-Kruger flavor to me, and it would be nice if Buffett did something other than keep the dream alive.
Many investors are also afraid of being sold something they don’t need, and the entire wealth management industry is screaming “diversification!” because (in these investors’ view) it allows the wealth management industry to charge for products and services.
So, we have an investor profile that is both ready to believe they are above average researchers/stock-pickers who are also skeptical of professional services.
The diversification industry cannot help these people because they don’t want to be helped.
Speaking of concentrated stock positions…
and I recorded episode 2 of the Not Advice pod yesterday.
Live recording: Holding Too Much Company Stock?
We’re figuring out production and distribution on the fly, but eventually this will make its way to an editor and podcast platforms everywhere.
Chart crime
Landscape mode
Bureaucracy
It’s fine to write about non-tax things
