Would you leave money on the table?

INVESTING IN DIVERSITY MAKES PLENTY OF FINANCIAL SENSE (AND CENTS)

Would you choose to buy a hundred cars of the same model, year and colour?

Looking back from the ancient Mesopotamians all the way through to Keynes and Markowitz, diversification has been established as a cornerstone of financial investing. As we increase the number of holdings in our portfolio we should see an increase in overall profits by reducing the average loss potential.

Keeping this framework, let us replace the idea of stocks with founders, and the same logic applies. The more we spread risk, the higher the overall levels of returns on the portfolio of holdings should be.

If you had chosen to buy a hundred identical cars, any fault in manufacturing or change in market price of the specific car will hit the entire portfolio at once, demonstrating extreme concentration of risk.

However, if you choose to buy twenty cars of five different models at the same price this will water down risk levels considerably while providing a similar level of profit to the original one hundred cars.

Now imagine you could buy any fifty of these cars at a twenty percent discount, keeping all other things equal. Would you take that deal?

The discounted car scenario is a direct analogy of why venture capital investing in companies with diverse founders has shown to produce higher levels of return relative to the average portfolio. Empirical evidence shows us that diverse founders receive less venture funding despite producing higher levels of exit multiples than their peers.

At LiHT Capital, we love the idea of buying diamonds in the rough at a discount to take advantage of the mispricing of risk in the market.

Now we ask, would you choose to leave this money on the table?

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