What Financial Advisors Fail to Tell You
If you remember, in 2011, Berkshire Hathaway invested $5 billion in preferred shares of Bank of America, which was struggling at the time with numerous legal issues in the wake of the subprime mortgage crisis.
He’s done it again.
It was revealed that Warren Buffett’s Berkshire Hathaway invested billions of dollars in bank stocks during the third quarter, including a $4 billion position in JPMorgan Chase.
It’s likely that we will never know the specifics as to why Buffett decided to invest in JPMorgan Chase and I’m even more certain he’ll leave them out of his annual letter to his company. But it is now known that he owns stakes in a total of 10 banks with a combined market value of more than $85 billion.
You might be wondering why Buffett added another bank to his portfolio? I point you to his quote for the answer: “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
Many financial advisors recommend that you diversify for your own protection. What they fail to tell you is that it is also for their protection. Since most financial advisors cannot tell you exactly which stock or mutual fund is a great investment, they tell you to buy a bunch of them.
Instead of diversifying, my rich dad taught me to focus on finding the best investments. That meant sifting through hundreds of offers, studying, analyzing, and determining the pros and cons of each.
Learning to focus was one of the best real-world business lessons I received from my rich dad. It helped me become a better entrepreneur and investor. Focusing on investments also allows me to make more money with less risk, because I’m not buying a bunch of sub-par assets and praying they will do something.
Two Factors That Justify Diversification
So why do financial advisors recommend diversification when the world’s greatest investor chooses not to diversipfy? I believe there are two answers to this question.
1. Active vs. Passive Investing:
There are active and passive investors. Active investors tend to manage their own portfolios and assets, as well as hand-picking their advisors—who are not brokers or salespeople.
To be successful, active investors require a higher financial IQ, more real-world entrepreneur business experience, and a very smart advisory team. Warren Buffett is an active investor. Most people are not. Active investors should focus. Passive investors should diversify.
Some investments are riskier than others. Stocks, bonds, mutual funds, and real estate investment trusts (REITs) are very risky investments, hence you should diversify if you invest in them. If you invest in businesses, as Warren Buffett does, or real estate, as I do, you should focus.
The real question is: Do you want to become a professional investor or remain an amateur? If you choose to remain an amateur—a passive investor— then, by all means, diversify. Diversification keeps you from “putting all your eggs into one basket,” so if one industry collapses—as tech did famously in 2000—only a portion of your portfolio will be affected.
If, however, you decide to become a professional investor, the price of entry is focused dedication, time and study.
Warren Buffett dedicated his life to becoming the best investor he could be. That is why he focuses and does not diversify. He does not need to protect himself from ignorance simply because he has invested time and money to understand what he is doing.
Intense Focus, Intense Rewards
In Hawaii, there is a great organization known as Winners Camp. It teaches teenagers the attitudes and skills required for success in life. Winners Camp uses the word “focus” as an acronym, standing for “Follow One Course Until Successful.” I believe all children should be taught to focus, as should any investor who wants to be a rich investor.
If you look at anyone who has achieved great success and wealth, people like Warren Buffett, Oprah Winfrey, or Lance Armstrong, they have all focused intensely in order to win.
One of the reasons the rich get richer is because they are focusing, while the middle class is diversifying, and the poor are counting on Social Security.
Why You Should Seek Understanding, Not Answers
“I have $20,000. What should I invest it in?”
Kim and I get this type of question often. People have come to expect quick, easy answers, and they expect the “experts” to have all the answers. But the truth is, when it comes to investing, there is no one-size-fits-all answer. Just like we have no idea why Buffett bought into JPMorgan Chase.
The answer to “what should I invest in” is a personal decision based on what type of investments you are interested in and your analysis of specific investment opportunities. A piece of quick advice—even from the most knowledgeable experts—should never replace your own research and decision making. Don’t buy a stock just because a billionaire did.
This is why I encourage every reader to invest in their own financial education first and foremost. Turning your money over to someone else to invest or acting on a tip from someone else means that you are leaving the fate of your money— and more importantly, the future you want to create with that money—in someone else’s hands. Wouldn’t you rather be the one in control?
The next time you have the opportunity to speak to an investor—whether it’s a well-known expert or simply someone who is actively investing— don’t just ask what they are investing in, ask why. Get to know their thought process, the way they analyze a deal, what factors they consider when choosing an investment.
To become rich, I recommend investing in your financial education. There’s a difference between that and financial advice. A solid financial education allows you to know the difference between good advice and bad advice, rich advisers and poor advisers.
If you want to become rich—and remain that way—it’s important to know what financial advice is best for you.
By increasing your financial education, you will gain the knowledge you need to make sound decisions regarding how to invest your own hard-earned money.
Editor, Rich Dad Poor Dad Daily