Diversification in the Soros Empire
Photo Source: The New Yorker
Diversification is thought to be a good thing in investing. Famed Bridgewater founder and billionaire Ray Dalio calls diversification the, “Holy Grail of Investing”. While opinions differ regarding how to diversify (stocks vs asset classes) and how much diversification is optimal, the consensus view is you want to diversify your investments.
This consensus is perhaps why the following comments from various members of the Soros empire over the years are so interesting. Cognizant that minimal competition and lucky timing played a role in the success of these guys, they have some of the most enviable track records in the history of the game. Meanwhile, their views on diversification are not the norm per their quotes below. The combination deserves consideration if nothing else. Quick note, sources are hyperlinked to the speaker’s name below.
“I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept anywhere. And if you look at all the great investors...they tend to [make] very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved...if you really see it, put all your eggs in one basket and then watch the basket very carefully.” – Stan Druckenmiller
The above commentary is powerful enough that it is worth sharing very similar comments from Druckenmiller in a more recent interview:
“When I’ve looked at all the investors of very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common. And it’s the exact opposite of what they teach in a business school. It’s they make large concentrated bets where they have a lot of conviction. They’re not buying 35 or 40 names and diversifying. I don’t know whether you remember, Icahn a few years ago put $5B into Apple and I don’t think he was worth more than $10B when he did that. When I went in to tell Soros that I was going to short 100% of the fund in the British pound against the Deutschmark, he looked at me with great disdain because he thought the story was good enough that I should be doing 200%, because it was sort of a once-in-a-generation opportunity. So…they concentrate their holdings…this is very counterintuitive…in my thinking, [concentrating your bets] decreases your overall risk because where you tend to be in trouble is if you have 35 or 40 names and you stop paying attention to one. If you have a big massive position, it has your attention. My favorite quote of all time maybe is Mark Twain: “Put all your eggs in one basket and watch the basket carefully.” I tend to think that’s what great investors do.” – Stan Druckenmiller
With the quote immediately above in mind, the following comes from Joel Greenblatt’s book The Big Secret for the Small Investor:
“We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics…” – Warren Buffett
Returning to the Soros empire, many others share the same sentiment:
“George [Soros] used to say, ‘If you’re right in a position, you can never be big enough.’” – Scott Bessent
“Nick Roditi, who managed the Quota Fund at Soros Fund Management, is the other fund manager I admire. He knows how to find two or three investment themes, take enormous positions, and stick with them for multiyear periods.” – Scott Bessent
“If the stock goes up you buy more. You don’t care how big the position gets as part of your portfolio. If you get it right, then build [the position].” - Allan Raphael quoting George Soros
“As far as Soros is concerned, when you’re right on something, you can’t own enough.” - Stan Druckenmiller
“Yes, you can diversify, and you will be safe, but you are not going to get rich…If you want to make a lot of money, resist diversification...you buy ten different stocks, the chances are that some will be good. You are not going to go broke, but you are not going to make a lot of money, either...Even if you do a good job, even if seven of the stocks go up and only three go down, that is fine, but that is not going to make you rich. The way to get rich is to find what is good, focus on it, and concentrate your resources there…” – Jim Rogers
So, how concentrated should you be if trying to achieve legendary performance? Some can be inferred per the comments above, but no one ever got specific in a direct way. That said, the following from Soros himself provides insight:
“One of the hardest things to judge is what level of risk is safe. There are no universally valid yardsticks: each situation needs to be judged on its own merit. In the final analysis you must rely on your instincts for survival.” – George Soros
With that in mind, the above commentary should be tempered by the following:
“If you want to get rich, find the few right things...But make very sure you are right. Because it is also a fast way to go broke…” – Jim Rogers
What’s more, that following comments from Soros and his former lieutenant, Victor Niederhoffer, are also worth keeping in mind:
“The idea that you can make a lot of wealth in a steady, unspectacular fashion, with no great gyrations, is a canard...If you are going to try and make forty or fifty per cent a year, tremendous variations are inevitable.” – Vic Niederhoffer
“BW: As I listen to the story of the Quantum Fund, what seems from the outside like an unbroken chain of success turns out to be a series of ups and downs. GS: You are absolutely right...There is no way one could produce results like ours without ups and downs.” – Byron Wien/George Soros
The larger point? Many of the guys with the best track records say that if you want to make exceptional returns, diversification is not the path. Caveat that they also indicate concentration brings potentially significant volatility in returns and can bring ruin. Food for thought.
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