Diversification

EAO Capital uses the principles of diversification and value investing as the foundation for all of our investment management discussions:

Before addressing the benefits of diversification, it is important to acknowledge a simple truth: the most spectacular results come from taking a concentrated position. Think of the world's richest people - their fortunes were not built on "diversification".

Diversification becomes more interesting when we acknowledge that a concentrated position can just as easily lead to disaster. In the blackjack example that was used to comedic effect in the movie Swingers, the strategy of "always double down on eleven" may be sound in theory, but if your initial wager is too large then one unlucky hand can wipe you out immediately.

Which is to say, context matters.  Even the best-laid plans can unravel - sometimes in ways that are predictable, sometime not.  Proper diversification reduces your exposure to any specific risk factor, which lowers the likelihood of experiencing a worst-case-scenario.

At EAO Capital, we consider diversification and thoughtful position sizing to be the core tenets of prudent portfolio construction.