It was Malcolm Gladwell in his 2008 work ‘Outliers’ who made the “10,000-Hour rule” famous.
Gladwell repeatedly referred to the rule whereby he says that the key to success in any field is a matter of practicing a specific task for a total of 10,000 hours.
Some key data behind the rule came from Swedish psychologist K. Anders Ericsson who discovered in a study that classical violinists all had one thing in common, that being that they all had undertaken at least 10,000 hours of practice before becoming a professional.
10,000 hours in sport
Gladwell’s theory certainly makes some sense.
As a young cricketer, I can remember that my peers who went on to become professionals dedicated thousands upon thousands of hours to becoming the best players that they possibly could be.
Some went on to dazzling careers and are still playing professionally or internationally today.
It was tough for those who didn’t make the grade, however, or those who were released from their professional contracts after under-performance or injury.
The huge focus that had been required to play professionally usually meant that studies, qualifications or developing networks of business contacts fell completely by the wayside.
Today, the more progressive professional cricketing associations offer greater support to young players, to ensure that if their cricket career doesn’t work out then they at least have alternative careers to consider.
Conflicting advice on diversification
It’s interesting how conflicting advice can be sometimes. Everyone knows the old adage: “Don’t put all your eggs in one basket.”
Yet, how does this tally with what Andrew Carnegie said way back in 1885: “Put all your eggs in one basket and then watch that basket. Do not scatter your shot. The great successes in life are made by concentration.”?
Famously, Mark Twain said the same thing, but then again, Mark Twain said most things.[sam id=35 codes=’true’]
Even Benjamin Graham, the doyen of successful investing, said that: “The really big fortunes in from common stocks have been made by people who packed all their money into one investment they knew supremely well.”
That was certainly an approach which did not faze Graham’s protégé, Warren Buffett, who at one stage held 40% of Berkshire Hathaway’s entire portfolio in shares in just one venture, being the Coca Cola company.
Think of the household names on the rich-lists over the years
Sam Walton of Wal-Mart, Bill Gates of Microsoft, John D. Rockefeller of Standard Oil, Richard Branson of Virgin, Warren Buffett of Berkshire Hathaway. They built their wealth through tremendous focus on one company or brand.
More recently, Steve Jobs became phenomenally wealthy as the founder and CEO of Apple, yet it is sometimes forgotten even as great a businessman as Jobs had his fair share of false starts and ventures which hit the skids in the past.
It should be remembered that if you put all your eggs in one basket, dropping the proverbial basket can smash all of your eggs.
It’s hard to stay on the rich list
It was Forbes columnist Kenneth Fisher who highlighted just how difficult it is to remain on the Forbes 400 rich list.
In 1982, the average net worth of members of the ‘Forbes 400’ rich list was $230 million.
For an average member of the 2002 rich list to have made it onto the 2002 version of the list, they would only have needed to have made on a 4.5% return on their net worth in order to remain on the rich list.
And over that 20 year period stocks were running hot returning an annual average of 13.2%! Yet only 64 out of the 400 members – a measly 16% – of the rich list from 1982 remained on the list two decades later.
For the other 84%, it seems that the industries and companies they used to make themselves so rich in the first place, failed to keep them at the top of the pile for a long period of time.
Specialise but diversify?
There is no question that becoming an expert in one area or field of investment is the route that a great number of successful investors take to becoming wealthy.
But that said, it makes sense for most to spread their risk to some extent within their preferred asset class.
Gambling 100% of your money on one company, no matter how well you feel you know it, is likely to be a volatile and potentially risky approach to personal finance.
This has been shown over and over again in cases where employees invested their pension and retirement plans in shares of the company that employed them – corporate failures can and do happen.
In the property world, similar principles apply
Investing your financial future in one large property development might reap dividends, but it is probably healthier for the volatility of your portfolio (and for your disposition) to spread your risk across a number of property types and cities.