How to Diversify Like a Billionaire

How do billionaires become billionaires? If you had a rand for every person worldwide who has asked that question, then you would quickly attain these dizzying heights. Leaving aside inherited wealth or outrageous good fortune, the shared traits seem to be an eye for potential; a smart mix of risk and discretion; a lot of common sense; and a willingness to diversify income streams and investment portfolios.  

Putting all your eggs in one basket is fine if you’re shopping at the local market, less so if you’re building wealth in a complex and uncertain world. Indeed, there’s an oft-quoted statement that suggests the average millionaire has seven streams of income. 

The legendary Warren Buffett, for example, owns more than 60 companies in industries as diverse as railways, fast-food franchising and alkaline batteries.  

Another way that the famous Oracle of Omaha ensures he is diversified is by investing some of his wealth in the likes of the S&P 500. That way, he owns a piece of each of the USA’s top 500 companies. Even if an entire industry experiences unprecedented turbulence, a portion of the index should still deliver a positive return. 

But diversification doesn’t mean a shotgun approach. Buffett only puts money into companies he understands, that have a track record of making money, and have strong management and little debt. You won’t find him taking long shots on ‘the next big thing’ that may pay off fabulously… or fail equally spectacularly. Frenzied buying during the dot-com or cryptocurrency booms has never been part of his strategy, and he prefers to hold onto his investments for the long term. 

When Bitcoin ‘is like the blackjack table’

John Catsimatidis, a New Yorker who made much of his US$3.1 billion fortune in real estate, also believes in spreading his risk. His property portfolio, for example, is geographically diversified and he is also into oil refining and supermarkets. 

“We’re pretty conservative,” he once told Fortune magazine. Catsimatidis, who avoids boom-or-bust sectors such as cryptocurrencies, once told his son: “Never put more money in Bitcoin than you would put on the blackjack table.” 

Keeping his money in different baskets includes having half of his wealth managed by his staff, while the other half is managed by big firms such as the Bank of America and JPMorgan Chase. He then keeps things competitive by playing one off against the other to see which investment teams have the best ‘batting average’ on a weekly and monthly basis. 

The philosophy of Africa’s richest man

Closer to home, Africa’s richest man – Nigeria’s Aliko Dangote, who has an estimated net worth of US$12.5 billion – started out in sugar, salt and flour. Then he branched into cement and has now diversified into the likes of oil, gas, steel, packaging and fertiliser.  

Like Buffet, Dangote believes in having a deep understanding of the businesses and sectors in which he invests. “I know my business in and out. You can wake me up anytime and ask me about fertiliser; anything that we are doing,” he once told news agency Bloomberg. 

One of his key principles is to stay calm as a manager and an investor. “I’m very quiet and I’m very calm,” he said in the same interview. 

But for all that, Dangote does seem more willing than some of his peers to make daring moves which others might shy away from. Perhaps this is why he once lost almost US$6 billion in a single year. It may also be indicative of Dangote’s willingness to make big investments in Africa, where outcomes are frequently less certain than in many other parts of the world. 

The value of an impartial viewpoint

Lastly, even the mega-wealthy aren’t afraid to seek professional investment advice. Risk-taking is just sensibly managing risk because you can see the likely benefits far outweigh the potential downsides. 

Having multiple sets of eyes – and varying experiences – managing your investment strategies therefore makes sense. Even billionaires with the wherewithal to afford large in-house investment teams should be aware of the ‘yes boss’ syndrome, where employees may go along with the craziest of ideas to avoid offending the boss.  

Established investment houses, which are impartial and have more to lose than gain by going along with marginal investment ideas, are therefore a valuable resource. 

Related Reading