Mark Cuban's Take On Investing: Diversification Is For Idiots, Cash is King, & Invest in Volatility

Mark Cuban's Take On Investing: Diversification Is For Idiots, Cash is King, & Invest in Volatility. Billionaire entrepreneur Mark Cuban takes the stance that "diversification is for idiots", "Cash is king" and that we should hold onto our cash and "invest in volatility." In this post, we'll analyze his ideas and see what we can really learn from him.
Mark Cuban is a fascinating character with interesting, out-of-the-box ideas.

And in this video, he takes the stance that "diversification is for idiots", "Cash is king" and that we should hold onto our cash and "invest in volatility."

I'd like you to watch it for yourself and form your own opinions on his ideas.

And later in this article we'll break down some of his ideas and analyze the rationale behind them.

First some stuff to get out of the way: patents, job creation, the culture of litigation, other topics on politics and sports - not really relevant to us. (Though I enjoyed the Mavs' championship run.)

#1 "Diversification Is For Idiots"

First we have to acknowledge one thing: he is a billionaire and can afford to take more risks that the average joe. Case in point: the $200,000 he lost in the Facebook IPO is just "gambling money."

However there is an unstated fact underlying his sentiments: You are not going to make money with diversification because it's not meant as an asset accumulation tool. It's a tool for safeguarding your investment. So the primary result is to not lose money; not necessarily to make you more money.

So practicing diversification doesn't make you an idiot. Trying to get rich by diversifying does.

So what he's really saying is that if you really want to make money, you can't do it by diversification. Which goes to one of the things he was saying - invest in something you know.

#2 "Cash is King"

Cuban's main argument is that cash has transactional value - you can spend it, you can realize real gains right now (through savings on bulk buying), and helps you sleep at night to boot.

He's touting the transactional value of cash, and how inflation is not a reason to not keep cash. By doing your budget, and storing up on non-perishable stuff or consumables you use often, you can realize a better return than most investments.

That's partly true. Cash is king, and you do save a lot of money bulk buying. But that only means you shouldn't invest without first getting your finances in order and having an emergency fund.

If you're paying yourself first, even after doing this there should continually be money left for you to invest. Which brings us to another of his points.

#3 "Invest in Volatility"

This is where it gets really interesting. His whole strategy is to wait until he sees the right play, then go all-in.

This is where you can see what a risk-taker he is but, counter-intuitively, also how cautious he is. There is no safer investment than cash in the bank. And there's no safer route than investing in only what you know and when you know it's time.

Which reminds me of a Warren Buffet quote:

"The stock market is a no-called-strike game. You don't have to swing at everything—you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"

What Cuban's talking about here is opportunity cost. Most of us don't really consider this factor in our decisions. We make the best decision we can right now and go from there. His approach is totally different: wait for the right pitch, and then swing - and swing big.

And for people who have the means and the fortitude for it, it's worth thinking about. Over the past decades there has almost regularly been a big, catastrophic event. The Asian Financial Crisis, the dotcom bubble, the sub-prime mortgage bubble, the recent global financial crisis, the Japan nuclear disaster, the ongoing Euro Crisis, the disastrous flood in Indonesia. And here in the Philippines we've had Edsa Two, Edsa Three, and Trillanes' two failed coups.

In short, black swans appear regularly.

There's always something that brought down asset prices. If you had cash at those times and weren't afraid, you could've bought assets at discounts and come out way ahead right now.

An old post by Investor Juan actually partly addresses this as well: One of the 3 reasons for holding cash is to take advantage of rare opportunities.

So do I think Mark Cuban is right? Well, it was right for him - he's a billionaire now, so how much fault can I really find there, right?

But as Fitz would say, personal finance is a personal matter. This approach worked for Cuban, but it may or may not work for anyone else.

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  1. Thanks for sharing this video. My favorite statement from Mr. Cuban would have to be, "If you don't know what to do, keep your cash." He also mentioned investing in stocks, bonds and several businesses including a sports team. So for someone who says that diversification is for idiots, he is a pretty well diversified investor himself.