Krishna Memani on Wall Street's Very Expensive "Free Lunch"
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What is the central paradox about diversification versus US tech concentration?
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Hello and welcome to another episode of the Odd Lots Podcast. I'm Jill Weisenthal.
And I'm Tracy Alloway.
Tracy, this has come up a few times on the podcast over the years, but you know, you really feel dumb there you you could really feel dumb as an investor over the last, I don't know, fifteen, twenty years if you literally bought anything else besides big tech stocks.
Big US tech stocks.
Big US tech stocks. Yeah.
Yeah, that's exactly right. And the funny thing is, investors have been encouraged to diversify, right? Oh, yeah. Like this is the mantra of markets is that you shouldn't put all your eggs in one basket, et cetera, et cetera. And so you've heard for the past ten or fifteen years that you should diversify into international stocks. You should diversify into small caps. Sixty forty. Yeah, sixty forty and a lot of those things have turned out to be duds, or at least sixty forty was a dud for like a couple of years. Kind of well kind
of. I mean it mostly did well, but like yeah. It it then it had some it had some rough years, particularly out of the pandemic when certainly
you would have been missing out on big gains if you put money into small caps or international stocks versus the big US tech stocks.
Right. And you know, we've gotten a little bit, you know, when Deep Seat came out, that raised some questions about big tech stocks. Obviously, with the policy volatility in the US, which is one way to put it. There have been some questions about okay, is now the time to diversify abroad. Yeah, okay, you could've m buy uh bought money buying Rhine Metal or one of the beneficiaries of German defense spending. But so far, you know, it's still not obvious that like there's some other big moneymaker out there for investors besides uh big tech. But this is but we we may be at a juncture.
Well, I think the other unappreciated aspect is the importance of the benchmarks in all of this. And I think investors tend to think of benchmark index providers as these very neutral entities that are like holding out a mirror to the market and just reflecting what's already there. But actually a lot of their decisions are very active and have very, very big implications for investors. So, you know, if MSCI says that the all world index is gonna have small caps and big caps in it, then investors are, you know, they're forced to buy small cap exposure.
That's totally correct. And it's this is core finance theory that the optimal portfolio is more or less the global portfolio. We've talked about that with the dimensional guys. You really should have a weighted allocation somehow, if possible, to every bond, stock, and piece of real estate out there. And that's the best you can do. And that clearly has not been the best you can do for a long time. And so we want to talk about the tortured pain of the poor diversified allocator. And the
tyranny of the benchmark index providers.
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Chapters
8 chapters
1
What is the central paradox about diversification versus US tech concentration?
0:00–5:47
2
How does Krishna Memani explain why diversification has underperformed in recent decades?
5:47–12:08
3
Why do benchmark index providers influence the success of international diversification?
12:08–16:50
4
What economic and market drivers have made US large‑cap tech outperform global assets?
16:50–23:19
5
How might the shift in dollar strength, fiscal policy, and global flows change the diversification equation?
23:19–30:29
6
What time horizon should investors use to evaluate the effectiveness of diversification?
30:29–36:48
7
How does career risk affect portfolio managers who are mandated to diversify internationally?
36:48–40:56
8
What practical lessons can investors take from the discussion on concentration vs. diversification?
40:56–41:19
Speakers
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