Responding to Mark Cuban’s Video on Investing: Diversification is for Idiots

Although I am two years late finding it, I managed to catch this interview with Mark Cuban on investing. In it he makes some controversial statements on diversification, jumps on the bandwagon that buy and hold is dead and preaches of the benefits of homework. I am here to explain to you, that his ideas don’t apply to everyone.

Diversification – Buy and Hold is Dead

Mark Cuban loves to play the controversy game but, it is quite popular now to take an opposite view of buy and hold as well as diversification. The difference here is that Cuban actually puts forward a reasonable explanation as to why.

First of all, buy and hold is not dead. It still works for the average investor. Remember, most people don’t have the time, energy or will power to be constantly updating themselves on markets and earnings reports. Second, diversification is specifically designed for those people. People who cannot afford to take on more risk might be better served by spreading out their odds and just matching the market.

And let’s be honest, Cuban is diversified and firmly believes in it. Besides his ownership of a sports team, he is an author, blogger, actor. He also owns a chain of movie theaters, a film distribution company and has repeatedly made attempts at owning a baseball as well as hockey team. He is currently an investor in UFC. Sounds pretty spread out to me as risky as sports and entertainment are.

The Real Reason Cuban Doesn’t Like the Stock Market

Mark Cuban knows that the stock market is full of fees, schemes and gimmicks. Like the San Fransicso Gold Rush, the shovel salesmen are making the most out of this. In this case, we are referring to analysts, fund managers, talking heads, newsletter writers, brokers etc. Whether or not the market is performing, they are doing well because you’re listening and taking action.

Thus, Cuban’s approach is a little different. Given the excessive amount of money at hand, he bought a sports team. Although sports teams are risky, he prefers to invest in something he actually thinks he has a lot of control over. The same is true of all of the tech companies he was involved in that were, by luck and skill bought up right before the .com bubble.

If you or I were to take our hard earned money and invest it in a business we are involved in, it is likely to see a higher payout than the typical percent from a fixed income portfolio or the average dividend stock.

Pay off Student Loans and Credit Card Debt

As filthy rich as Mark Cuban comes off as, he is still down to Earth and understands the essentials. Student loans and credit card debt average have far higher interest rates than the typical investment. Most credit cards start out around 15%. The average investor would be incredibly excited to reach 10%!

Student loans are a little bit more forgiving because they are usually locked into better rates through the government, close to 6%. Many though have minimum payments of $200-500 a month for Federal and Parent Plus Loans, assuming they are not through a bank or other lender.

I have to applaud Cuban on this simple lesson. Although it is important to get into a habit of saving and investing, those with incredible student loan and credit card debt should not be concerned with trying to put more and more in the markets. That debt requires substantial hardship and is compounding. Instead of taking chances in the market, debt holders should relish the thought of payments that guarantee a payoff.

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