Diversification: It's A Small World After All
It’s amazing how many life lessons you can cull from the financial sector and asset management. Recently an internal memo from Google (GOOGL) was leaked, by all accounts by a disgruntled engineer around the diversification issue and how seemingly unqualified people of different race/gender than the author were being hired and promoted. I’m not going to get into a philosophical debate over the merits of his thesis, but I am going to try and briefly explore how diversification in your finances and diversification in your company makes a whole lot of sense!
It’s important to remember, diversification for diversification sake is harmful and unwise:
Wide diversification is only required when investors do not understand what they are doing."
- Warren Buffett
However; diversifying your company/portfolio with well qualified people/stocks from all walks of life, will ultimately make you a more resilient and forward thinking enterprise/investor -- and I’d argue more profitable to boot!
If you invest and don't diversify, you're literally throwing out money. People don't realize that diversification is beneficial even if it reduces your return. Why? Because it reduces your risk even more. Therefore, if you diversify and then use margin to increase your leverage to a risk level equivalent to that of a non diversified position, your return will probably be greater."
- Jeff Yass
To understand the benefits of how diversification works, you don't have to look farther than mutual/index funds. They can become even more beneficial if they are equally weighted. I wrote an article on the subject. I'm not going to harp too much on indices, but their outperformance is common knowledge, and whether active or passive, they deliver continued growth with relatively low risk.
So what makes a good diversified portfolio?
The portfolio should be spread among different investment assets or vehicles: stocks, bonds, treasury notes, mutual funds, cash, real estate (if you are lucky enough).
Risk variance is pivotal in properly balancing your portfolio to allow for growth or speculative stocks to mature, and value stocks to essentially unlock value and be used as hedge against uncertainty.
And most importantly, you should vary your investments by industry/sector. You’d be generally hurting if you only invested in retail these days or oil/energy, as you would have been in tech during the “dot.com” bubble. Therefore identifying solid stocks across industries will equally distribute risk while allowing for sizable growth.
So how does diversification in stocks relate to diversification in a business? And moreover how does diversification in business benefit its enterprise and long term growth trajectory?
According to the US Census data: the minority population is almost at 40%.
If a given user base some what resembles the tapestry of the country, you’d want your business to best represent your user base to ensure you can satisfy and forward think your user base’s needs.
Women make up over 50% of the population.
A business that can harness the power of ideas and innovations from all walks of life, has a better chance to clearly identify future needs and product roadmaps, that will inevitably bring more success and profit to the enterprise.
Tinder (MTCH) (online dating app created by two men) → Bumble was created by a woman and met with great fanfare. It's focus was to create a woman-centric dating app, that was intended to be a less lewd experience than many of the women experienced on Tinder.
Snapchat’s executive team is made up of mostly white men (and hemorrhaging market share to Instagram); while Instagram has a woman CEO and Facebook (FB), its parent company, has had Sheryl Sandberg running operations for almost a decade, and has contributed to much of their success.
So what does it all mean?
Diversification is just simply smart, and the only real way to allow for unique ideas to grow and flourish. The United States demographics are changing, and so should the boardrooms and rank and file of tech companies. Like I said before, it’s not about diversity for diversity's sake; but for a strictly mathematical/formulaic and business sense. It will also be easier to sell and create products for the audience you know and come from. A company that wants to be internationally appealing, or appealing to the broad spectrum of American users, will have to identify and cultivate cross-gender and cross-race themes that seem to resonate; that will be much easier if the company actually employs those people.
Women make most of the purchase decisions at home and are on their smartphone and social apps far more than men. They are the prized demographic, advertisers to app makers court. It’s nonsensical to me, that anyone in the tech industry would not want women making up not only the rank and file but the executive staff as well.
Diversity = Good Business
I’ll conclude by saying, hiring people outside your core demographic, just to boost your diversification numbers is silly and could harm your business (if they are unqualified). However, companies should make it their mission to find and recruit qualified people from different backgrounds, races, genders, and countries, to cultivate a plethora of ideas, concepts, products, strategies, and opinions to make sure whatever they produce has wide appeal. No matter if a company is made up of a bunch of white geeks, female scientists, or asian bankers; unless their entire business model is selling to that niche market (and even then I could argue why it would be important to diversify outside of that demographic) a business should be hiring the most talented and well rounded individuals.
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May your falling knives never cut too deep,
Remy Kouffman AKA The Knife Catcher
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.