

Why Diversification Results In Mediocrity - mspeiser
http://gigaom.com/2009/07/12/diversification-mediocrity/

======
navanit
There's an implicit assumption in his argument that the mean is stable and
finite. This need not be the case, and is often not the case with tail events
under power-law distributions: <http://navanitarakeri.com/Diversification.pdf>

Also see the following: Didier Sornette and Daniel Zajdenweber, The economic
return of research: the Pareto law and its implications, European Physical
Journal B, 8 (4), 653-664 (1999)

here: <http://xxx.lanl.gov/abs/cond-mat/9809366>

There's also an excellent (and old) study on whether restaurants with
specialized menus did better than restaurants with diverified menus. Turns out
the specialized ones did well in the short term, but were vulnerable to sharp
changes in taste by patrons. The more diversified ones had much higher
longevity but did relatively poorly in the short term. I can't find the
reference right now.

Finally, this "Fox vs. Hedgehog" problem is widely studied, and the research
shows that the decision is very dependent on the market and domain - i.e it is
difficult to generalize.

------
russell
In the large he's pretty much wrong. In the small, like a startup, of course
you have to focus, otherwise you are pretty much dead. However, if you invest
in publicly traded mutual funds, the returns from an indexed fund beats nearly
all managed funds due in part to the differences in commissions. In
agriculture, monoculture is riskier than diversified agriculture, e.g. the
Irish potato famine, or the imminent failure of the Cavendish banana. The
financial crash was due to everyone following just a few strategies. Even VCs
try to diversify their holdings.

His point about understanding each individual investment is good, but if you
cant, diversification is a good strategy.

------
prodigal_erik
> I believe an investor can leverage knowledge he has about a particular
> industry or company to beat the average on a risk-adjusted basis.

If that were true, wouldn't mutual funds be able to find full-time pro
managers who can consistently outperform index funds?

