Diversification vs. Focus: Lessons from Warren Buffett

0:00If you're in a fund and you're literally invested in hundreds of businesses, then that's less than him buying individual businesses. But I do think it's fascinating that oftentimes the opposite of good advice is more good advice. And like, so good advice, you should diversify. Good advice, you should focus.

0:21Hey, everybody. Welcome to another episode of Business Lunch. Technically, it's business post-lunch because Ryan and I just literally had lunch together. Literally had lunch. Somehow we have had lunch and are both staying awake and long enough after to have a business lunch podcast. So anyway, welcome to the show. Ryan, how are you doing? I'm doing really great. We didn't have any wine or anything at lunch, and that's probably a good thing. I have five bottles open, as you know, that are sitting in the cold room. and they are from our Bordeaux tasting. And I think that they should probably be approached after our meeting today.

1:02Oh, we're going to drink the crap out of it. Yeah, that's happening. That's happening. But first, we got to give the people what they want, which is amazing insights, ideas and stuff that's going to make their business be just insanely successful. So what's on the docket for today? I was thinking that we would talk of, did you see that Warren Buffett released his latest shareholders letter? I didn't. I didn't. He didn't. Which normally I actually do try to make a point of reading his shareholder. At least I start. Every single day I read all when they come out. I definitely start reading most of them, but they're fairly long.

1:38They are. So I don't know that I've made it all the way through any of them, but I typically at least make an attempt at reading it. What do you have to say? Well, I think interesting. The highlight, the big highlight, I think, was that the Berkshire portfolio since 1965 when he came in was up 4 ,400 ,000 % compared to 31 ,000 % for the Standard & Poor's. So the S &P not doing terrible over that period of time, but obviously he's doing significantly better. I forget the math in it. I think it said it was 251 times better, but I could be wrong. But you guys can do that math yourself. But it was pretty amazing.

2:19And I know you and I were talking not long ago about his saying on diversification, which I think you have memorized. You want to share that with folks? It's diversification is a protection against ignorance. It makes little sense if you know what you're doing, is what he said. Diversification is a protection against ignorance. It makes a little. Which is interesting. It's interesting for him to say, though, because he owns an insurance company. a soft drink company, a candy company, a furniture warehouse. Insurance company. I mean, it feels like he is actually pretty diverse. So I'm not sure if he's like, did he say that when he owned just the insurance company?

3:03I think he's basically talking about why, if you know what you're doing, you should invest in individual companies as opposed to a fund. But I still think it's in. So obviously we're talking about something that's very relative, right i mean so diverse about if you're in a fund and you're literally invested in hundreds of businesses then that's less than him buying individual businesses but i do think it's it's fascinating that oftentimes good at the opposite of good advice is more good advice and like so good advice you should diversify um good advice you should focus like those are both good advice i think it's worth like like what like when when is it right to focus and when is it right to diversify.

3:43What do you think? I've had that same challenge with cliches because it's look before you leap, but he who hesitates is lost. I mean, there's like, but it's hard. So let's talk about it. So, and the other, on the other side, our buddy, our buddy that owns LVMH that founded that at least you said, you said, now that we've shared an airport suite together, I feel like we we go way back, but you read something, I think that there was a little challenge in LVMH land. Yeah. So at LVMH, if you don't know, it's, you know, one of the more valuable companies in the world and they basically, Bernard Arnault acquired, rolled up pretty much every major luxury brand that you've ever heard of.

4:28So Louis Vuitton, Moet Hennessy, just a few of them. I mean, what are some of the other big LVMH brands? Luxottica owns every single basically luxury eyeglass company that you can think of. Cheval Blanc, obviously, for the hotels and the wine, which is pretty good. And then I believe that they own Fenty Beauty, which is with Riri, who we all love. But yeah, quite a few. It might even be, is it Christian Dior? There's another fashion house that they've got as well. But yeah, he's basically like, so LVMH has been struggling a little bit on the market. And the idea is like what I was reading is he's kind of getting assessed with the conglomerate tax.

5:12And so while CEOs really love and entrepreneurs very often, we really love the idea of rollups and holding companies. We love the diversification that it brings, you know, how you can have some that are a bit, you know, maybe even counter cyclical, although pretty much all luxury. So not really counter cyclical. But Wall Street's a center, not Wall Street necessarily, but I mean, investors are basically saying like, hey, the reality is when you own this many companies, you're not focused on any one of them. So we're kind of going to assess you a little bit of a conglomerate tax here. We'd much rather see CEOs that are focused on just building the one brand.

5:46And so there's talks about how you may have to even start selling off some of these brands. So it is this constant tension between, should we diversify? Should we roll out more products or should we focus on the ones we have? Should we look to do M &A and grow that way? Or should we just focus on what we have? And I just think it's equally good advice, depending on the time, that yes, you should focus and yes, you should diversify. Because right now, he looked like a genius for rolling up all these things, but now they're saying, oh, maybe it's not as smart. So who's right? I think the thing is, it depends.

6:21It depends on timing, depends on where you are in your entrepreneurial journey. it depends. That's super helpful to people. So either diversify or don't diversify. And keep in mind that it depends and you're welcome for that advice. Okay. Well, how do we reconcile these things and come into some sort of helpful conclusions, do you think? I think early on when you're first getting started, focus is the answer. And I do see far too many entrepreneurs, and I'm guilty of this as well, trying to launch multiple businesses at the same time. And I think when you're in startup mode, trying to start multiple businesses at the same time is not a great idea.

7:03And people will talk about, oh, but Elon Musk, he's the CEO of Tesla, but also SpaceX, but also it's like, yeah, but those weren't necessarily all started at the exact same time. They were funded. They had good teams. They've got operators running them. He's alone in his ability to have done that, right? Yeah, and also you ain't Elon. So let's just settle that aside. So far in history that I know of, nobody else is either, right? Right. So I think if you're running a company, if you're operating a business, then yeah, you do want focus. But I also think that there comes a time when you've got to shift from, okay, I'm the inventor and I'm focused on this one particular product.

7:42Like solving, you know, having one product that solves one big problem for one person, right? One product, one problem, one person. Like that's kind of the, you know, in the beginning, I think that that's everything. And then what do we start to do? Well, now our focus shifts to focus on building the company. So we shift from, you know, a focused inventor to a focused builder. But I think at some point, if you want to scale, you've got to start thinking less like an inventor, less like a builder and more like a capital allocator. And I think every great capital allocator is going to have some aspect of diversification.

8:18I mean, that's just going to be a tool that they've got to play. So I do think it's a timing. And I do think you're also going to waffle back and forth in your career for when it's appropriate to focus a bit more when you've got to diversify. I think anytime, though, you find yourself wanting to diversify, there better be somebody around who's focusing. Because if everybody is in diversification mode and nobody's focusing on the individual, that's when I think it becomes a problem, especially for smaller businesses. I don't know what the structure of LVMH is, but one thing that I will say towards Buffett is that his investments are generally based around the CEO and the operating team.

9:03And he's very, very hands-off. I think they have 26 people in Omaha that despite the, I think it's hundreds of thousands of employees that I think it's 400 ,000 employees, some large number that all of his companies and major investments have. He has 26 employees. He is not diversified in how he goes about identifying the investments to pursue. He is not diversified in that he's going to hold on to cash. I think they have 186 billion now, more than the market value of Uber and Airbnb in cash, just sitting on the sidelines because they haven't found a place to deploy it and they're in bonds. And the companies that he's got are in fact fairly focused.

9:50If you look at each of them, like the Omaha Furniture Company sells furniture, sees candies, sells candy. It doesn't sell toothbrushes and dental care and other things that might be indirectly related to it. And so across the board, I think that they are, he is an investor and he's investing in companies and they haven't diversified. So there's not Buffett hamburger sauce, right? There's just basically Berkshire that invests in companies using a singular method or thesis to find the companies that they have. And then the companies themselves are not forced to become part of the conglomerate and buy each other services, they are happy.

10:32You know, they're like, they're free to do what they want to do. I don't know if LVMH is like that. If it is more conglomeratized, then it might suffer from some of that. Although given the fact that he's consistently, you know, number one or two richest man in the world, I got to think that he's doing okay, you know, despite what the media says. So it'll be interesting to see. and it might be worth us diving a little bit into the structure of that company to see how, you know, and you guys that are out there too, love to hear from you if you know, but that would be something that we'd like, is it a conglomerate so that it's just a, you know, a pressing together of a bunch of unrelated things like the old, I think it was, was it GE under Harold Janine was like that GE Capital and all that stuff.

11:17They just bought all kinds of completely unrelated companies and had hundreds of them. LVMH seems to be pretty focused on the luxury space and serving that well. So it would be interesting to know because I think there was a little suspect of that article, which I haven't seen yet. But yeah, I think the article was primarily criticizing. He like added two of his sons to the board was a big part of it. And so it's not seeing it. And look, there has been a pullback in luxury as interest rates have gone you know, have gone up as the markets pull back a little bit, you're always going to see luxury take a bit of a dip, but that's just a market cycle.

11:57But there are folks who anytime, anytime things aren't all just up into the right, people are going to start to question ultimately what you're doing. Usually broke people that write articles as opposed to - Usually broke people that write articles. But I do think it's important to point out, this is for all entrepreneurs out there. I think that diversification is a luxury, not a right. And so your ability to diversify is going to be a function of how good of a job have you done with the core business that you have today of getting it systemized and getting it scalable. And when you make the decision, okay, we're going to diversify.

12:32I think you got to be clear on, okay, who's that we? Because every time, I mean, I remember I decided that we were going to diversify the businesses that we had. We were exiting some companies. And so we had one other business that was still kind of in our portfolio that I was actively running. I was like, okay, we need to diversify. The problem was, is we didn't have enough executive level talent to go around. And so when I decided that we were going to diversify, I basically said, okay, executive team, we're now all going to work on multiple projects at the same time. And that just only never works.

13:12So I think if you're going to diversify, you've got to build a strong enough business, a systemized enough business, and a profitable enough business that it can afford to have that, it can afford to basically have its single-threaded team, a team that is solely focused on that so that you can achieve what we talk about. We talk about the five exits. Exit number three is when you can exit the org chart. When you're able to exit the org chart, that means you're leaving an operating team fully systemized, fully operational. You're leaving them behind to focus on the existing business so that you can go out and pursue diversification, either in the form of another startup or another acquisition.

13:51But if you simply say, I think we need to diversify because I'm bored, then you're probably going to wind up creating a very exciting situation for yourself while you're simultaneously having to keep the plate spinning at the old company while launching the new. Yeah, agree 100%. Awesome. I like it. Well, that was pretty cool. I like it. So I guess the takeaways are, if you're going to diversify, be sure that you are, number one, thinking about what are you diversifying? Are you diversifying your existing company and team or are you diversifying your own investment portfolio? If you're going to diversify your existing team, be careful because usually what we've seen is that that is very difficult to pull off unless it's a pivot.

14:40A pivot is basically moving from one thing to another for a good business reason, moving away from something maybe that's not working or that isn't the larger opportunity to address the larger opportunity, but not continuing to do the old thing. You're literally moving in a different direction. You're still focusing. You're just changing what you're focusing on. Exactly. Whereas a personal diversification is that you've got the team in place, they are focused on whatever the thesis of the existing company is, and now you're going to do something different with a different team. And that makes sense, I think, particularly if you look at Bridgewater and Ray Dalio, his claim to fame is basically counterperforming markets.

15:25So that the risk is if one market goes down, then the other market goes up, and then that lets you have stability over time. So if you were going to invest in an ice cream shop, which is popular in the summer months, but not in the winter, and then you invested in a winter clothing company, you know, or a hot chocolate company, then you would have that diversification. Super simple. Obviously, his is more complex, but that's kind of the idea. And instead of doing that one thing and having your one company go from hot chocolate to ice cream, you're actually going to say, let's go all in on hot chocolate.

16:00and then let's build a team, invest a team or acquire a company that does this ice cream so that we've got the two. That I think makes a whole lot of sense. And that's what we see Buffett doing and something that we'd be curious about Arno. So anyway, hope that's helpful for you guys. And if you enjoyed this episode, then please share it with a friend and we'll see you next time on Business Lunch. Ever wonder how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals, and the right guidance.

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