Why Diversification Doesn’t Work

Today’s subject is one of my favorites. It is on diversification, or what we like to call deWORSEification. I, of course, did not come up with that phrase. It’s been used by billionaires like Warren Buffet, Peter Lynch, Sam Walton of Walmart fame. They’ve all called it deWORSEification at one time or another. So we’re going to deal with diversification today and how to use it properly, which oddly enough means don’t use it the way that the average person is using it.

Let me start off by saying why “don’t use it” when that is the logic and the common sense that’s going on in America right now? It’s simple. With the logic and common sense that is “don’t carry all your eggs in one basket,” 96 percent of Americans at age 65 cannot write a check for $600. See, if you’ll let go of what I like to call the ego—the ego that wants to be right, the ego that wants to do what everybody else is doing, the ego that doesn’t want to be different, that doesn’t want to be made fun of—if you’ll let go of all that and simply look at the results of that strategy, you will find out that it’s ludicrous.

The people that espouse this, the financial planners, the guys on TV, the pundits—and I’m not picking on these individuals for any other reason than their investment strategy—but the Dave Ramseys, the Jim Cramers, the Suze Ormans, they all got slaughtered in ‘87, ‘97, 2000, 2001, and 2008. Why? Because they did not know what they were doing when it comes to investing.

Own Businesses

You say, “Well, they still have money.” They all own businesses. They all own businesses, and their businesses excelled. They own TV, radio, books. They make massive amounts of money off of that. And I don’t want to sound pompous, we make great money off of our radio shows and so on, but what you’ve got to understand is that when they got slaughtered in the marketplace, we did not. In ‘87 we made massive amounts of money. In ‘97 when the stock market crashed we made massive amounts of money. In 2000 and 2001 when the stock market crashed we made massive amounts of money. When 2008 came and the collapse came of the stock market we made massive amounts of money because we’re investors and we’re focused, and we know what we’re doing.

The question comes down to this, though, and what we’re going to focus on in this first segment is: Why would a nation of 300 million people all be following a path that we all know doesn’t work? Ninety-six percent of 65 year olds cannot write a check for $600? So what we do is as soon as everything collapses we go right back to the people that got slaughtered just the same way we did—referring to the financial planners, your stock brokers—they got hammered just like you did, and you’re going right back to them.

Wrong Map

Why would a nation of 300 million people follow a path we all know doesn’t work and hasn’t ever worked? There’s a multitude of reasons out there, but my favorite explanation comes from a man named Dr. Stephen Covey in his book The 7 Habits of Highly Effective People. He says that the reason we do this is it’s not because we’re all stupid; it’s not even because we’re all insane—even though when a group of people or an individual does the same thing over and over again and expects a different result that is a form of insanity. He says it’s not because of stupidity or insanity; it’s because we’ve all got the wrong map.

See, the problem is all of us are trying to get to peace, joy, love, wealth, health, happiness—and we’ll call that Disney World. And from the time we’re old enough to walk people start telling us how to get to Disney World—co-workers, bosses, parents, people who love and care about us and people we should love and respect. However, once you do a complete analysis and you watch and ask questions of those people, the people that gave you your map, your business model, what you’re going to find out is that your parents, your teachers, your co-workers and your bosses who are all trying to help you get to Disney World—peace, joy, love, wealth, health, happiness—have all none of them been guess where? Disney World.

You’ve got to start dictating where your ideas are coming from. Let’s look in detail to where these beliefs come from. You hear them from your parents, you hear them from your co-workers, you hear them from bosses, professors even at college. My favorite story about this comes and how this was brought to light for me was when I was first a new member of Lifestyles Unlimited. I had just hired Del Walmsley the founder of Lifestyles Unlimited to mentor me. I was sitting at the back of a room one time complaining about my car note, my house note, my pay, my relationship with my wife, you know, everything that you can imagine I was complaining about it.

My Lesson on Diversification

Well, Del pulls me aside and says, “Hey, Steve, what are you doing with your money?” And if you will, the first thing that came out of my mouth was, “Well, I don’t know what I’m doing wrong, Del. I am diversified.” Now, when he stopped laughing at me, which I’ve told you before it seemed like a half hour but I’m sure it was just a few seconds, but when he stopped laughing at me he proceeded to ask me why I believed that I was supposed to be diversified.

Why do you believe you’re supposed to be diversified? Why when I say, “Go put all your eggs in one basket” does it become so offensive to so many people? To understand this I want you to look at your beliefs as if they sit on a table top. The table top is the belief diversification we’ll say in this case. Well, let’s use a different example so it’s easier to understand. Let’s use the eye of a stove is hot. That’s the belief. What holds up the belief and keeps it from falling into disbelief will be the legs of past experience. In other words, you know that the eye of a stove is hot because you’ve got past experience. You cooked on it, there’s one leg. You burnt your hand on it one time, there’s another leg. You boiled water. You did other things. You had past experience, and those legs hold up that belief and keep it from falling—the table top from falling into disbelief.

Referral Past Experience

But hold on, even at six months of age you knew the eye of the stove was hot, didn’t you? That’s right, you knew the eye of a stove was hot because you waddled towards that stove and someone who loved you stopped you. They picked you up, they hugged you, they kissed you, and they said, “Hey, don’t put your hand up there. It’s hot.” That’s a thing called referral past experience, and in that case it’s excellent. However, in most cases referral past experience is poor or unqualified.

Let me give you an example. Let’s go back to diversification. When Del asked me why I believed I was supposed to be diversified—there’s the table top diversification—I told him my first leg. I said my parents told me not to put all of my eggs what? And every one of you can answer this…in one basket. He asked me, “Steve, were your parents or have your parents ever been in the financial position that you want to be in?” I said, “No.” I said, “But, but, but, but wait a second. I took college prep economics. My high school teachers taught me not to put all my eggs in one basket.” He asked again, “Were your high school teachers in the financial position that you want to be in when you’re their age?” I said, “No.” Can you see how two legs under my table, under my belief about diversification are now gone? Can you see that that belief is starting to waver, starting to wobble a little bit?

I shut up at that point because my table wasn’t wobbling—it completely fell. Because if I hadn’t have been embarrassed I would of continued on to say when I was at a major university in Texas I went to a class where a professor complained about his car note, his house note, his pay, his relationship with his spouse, and then did guess what? Taught 150 kids economics.

I became painfully aware at this point that all of my beliefs about money had come from people unqualified to give them to me. Now, important are these people malicious—your parents, your teachers, your professors? No. The problem is they’ve never been where? Where you’re trying to go, therefore they are unqualified to teach you.

Billionaire’s Beliefs

Let’s take a moment just before the break and let’s rebuild this diversification belief with some billionaires’ beliefs. Let’s put that belief that your investments should be diversified on that tabletop. Now let’s see what is said about it by the billionaires. Can any of you right now spout off instantly what Andrew Carnegie—the richest man to have ever lived debatably but one of the richest men to ever live—what did he say about diversification over 100 years ago? It’s very simple. He told you to put all your eggs in one basket and spend your entire life making sure nobody kicks over your basket.

Now, isn’t it interesting that almost every one of you as listeners could finish the sentence when I said don’t put all your eggs what? In one basket. All of you could answer that. But I will bet you—‘cause I’ve given this presentation in front of 30 people and 300 and 500 people only one, two, three, maybe four people, less than one percent of Americans know what the billionaires said about it. To put other legs under there, the richest investor in the United States Warren Buffet, Sam Walton of Walmart fame, Peter Lynch, all call it deWORSEification. There it is right there. That’s the key.

If you want to start learning about money and start changing beliefs like diversification and start getting the real understanding of diversification, you’ve got to start dictating where your ideas come from. You’ve got to keep the ego in check and go, man, I do have some beliefs about money. I do have some beliefs about real estate. I have some beliefs about this, about that. Start questioning where you got them and see if the referral past experience that you have is not unqualified.

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