A recent story at Market Watch discussed the fact that rich people often diversify their investments poorly. Not mentioned is the fact that many people get rich through concentrated bets. But that’s a bad reason to do the same.
There are good reasons to look to successful people to see what they do well. However, using successful people as role models isn’t always a good idea.
A common way for investors to get rich is to make an extremely risky concentrated bet and get very lucky. However, for each person who takes a wild chance and gets rich, there have to be many more who take wild chances and lose almost everything.
It’s hardly surprising that people who get rich taking big chances would have a tendency to continue to take big chances. Others who try to copy this behaviour are likely to lose badly. If the rich role model was simply lucky, the next person probably won’t be lucky. If the rich role model succeeded through genuine skill, the next person probably doesn’t have the necessary skills.
I’m not saying we shouldn’t pay attention to what successful people do. What I am saying is the we have to examine whether copying a successful person’s actions is likely to work for us.