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ADifferentView of Diversification IS IT ALWAYS THE RIGHT TIME TO DIVERSIFY?
by Michael Zuber
ost people think diversification is like eating your vegetables—
to learn two or three markets at the same time as I would have confused myself and gotten nowhere fast. By focusing my spare time on a single market I was able to com- pound and grow my knowledge base much faster and thus find the great opportunities hidden in the noise. By focusing on a single market, I could learn price points, rents, and build a growing network while under- standing yield of the average deal. Learning a market means not only learning property values, but it also means learning to build relation- ships, meet new people and become much more knowledgeable about where you are about to invest signifi - cant dollars. If I had diversified my time and focus, I would likely still be looking at different markets and I would never have learned where the good or great opportunities are. Many new inves- tors make no progress because they are diversifying their scarce resource of time. Focus and daily discipline beat being diversified and learning multiple markets at the same time. A new investor who diversifies their time in the beginning will be beat by an investor who focuses on a single market. As Charlie says, don’t be a “know-nothing Investor.” But what happens after five years and you know the market cold? Why don’t you diversify then? Well, you certainly could, and many do
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it is just always good idea. Well, I have another viewpoint. Diversification might be a good idea, but it also might be a horrible idea depending on the investor and the situation the investor is in. Most real estate investors I speak to have a couple of significant constraints. Most don’t have a huge pile of mon- ey to deploy on day one and most have a significant lack of time. It is time constraint that makes diver- sification a horrible idea for most novice investors. Here’s a quote from Warren Buf - fett’s partner that I often share when I am asked about diversification: “The whole secret of investment is to find places where it’s safe and wise to non-diversify...It’s just that simple. Diversification is for the know-nothing investor.” —Charlie Munger As a full-time employee who was looking to start investing in real estate, I had a choice. I could focus my attention on one market, or I could diversify my time and look at multiple markets. I chose to focus on one market as I only had 20 min- utes a day to spend on building my baseline of knowledge and it was hard enough learning one market I never lived in. I couldn’t image trying
because the grass is perceived to be greener somewhere else. However, when you do this your time is spent learning a new market all over again and you could miss opportunities in your original market. Worse, your past strong knowledge base gets eroded over time and soon you lose your competitive advantage in your first market. People wonder why I never left Fresno California after 20+ years. It’s simple. I don’t want to start at zero in another market that may or may
76 | think realty magazine :: october 2021
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