Devoted to Managers and those that seek to improve their management skills

Arbitrary Diversification

There are a lot of things one can learn from Warren Buffett and how he invests, if you understand the underlying principles, and apply them to management.

Let's take his usual mantra about his holding period for stocks. He said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Some of the stocks he's given in the past for examples of businesses that won't undergo fundamental changes for decades were See's candies, Coke (KO) and Gillette.

He uses these businesses and the principles they run by as examples of not trading your various top stocks simply for what he calls "arbitrary diversification." He's said it before that diversification for its own sake is another way of saying you don't know the business or industry you're looking at investing in well enough.

When applying this to running our companies, it's a great thing to understand. If you watch companies, for example, that compete based upon technology, you see them create so much stuff based upon the fact that their competitors did the same thing. They think that if they continually push a ton of stuff out there, something will stick. While that has an element of truth to it, it's like playing the lottery.

It's even considered poor management to not do things this way by many. Instead of arbitrary diversification of investing in companies, it's now an arbitrary diversification of throwing out products or services.

The key word here is "arbitrary." Many companies and leaders take the word innovation and simply throw it around in a way that means just doing a bunch of stuff arbitrarily. Why are we creating new products or services? Everybody says it's what we should do. Why? Because everybody says it's what we should do.

There's got to be a better reason than that people write books about it and talk it up at seminars. Does that mean I'm saying that innovation is bad? Not at all. What I'm saying is that it still needs to be based upon the core purpose of the business.

Gillette will continue to innovate, but it will all be centered around razors and razor blades. Anything else wouldn't make sense. And yet a lot of companies diversify out of their core competence for the sake of diversification itself. This simply doesn't work.

The key is to not do anything arbitrarily, it needs to be related to our core purpose and competence. Buffett understands that with everything he does, which is why his performance is so superior to others over the long haul.

Other Buffett Sources:

10 Secrets Hidden in Warren Buffett's Wallet

The Warren Buffett You Don't Know

Warren Buffet-Strategic Planning

Some practical advice from investment guru Warren Buffett

Wisdom of Warren Buffett

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