Thiel: diversifying your portfolio is lazy and immoral

Steven Loeb · December 1, 2014 · Short URL: https://vator.tv/n/3aba

Using the "spray and pray" approach is like treating companies and people as "lottery tickets"

When we host our Post Seed Conference on December 2nd, in partnership with Bullpen Capital and Venture51, Vator will be honored to have one of the most successful entrepreneurs in Silicon Valley: Peter Thiel. Of course, besides being the co-founder and former CEO of PayPal, as well as  a managing partner in Founders Fund, Thiel is also sometimes a controversial figure. He is certainly someone who says what he believes. (*Full disclosure: Thiel is an investor in Vator).

For example, during an interview with author and investor Tim Ferriss in September, Thiel was asked about what he thought about investors who "spray and pray," or putting money into a whole bunch of different companies and hoping one will pay off,  "instead of focusing on just five to seven companies in each fund." 

The latter type is what Thiel does at Founders Fund,  and he made it clear that he has no intention of ever putting the former in to practice. In fact, he sees it as mostly a sign of laziness on the part of the investor.

"I think that people would say that they spray and pray because of some sort of portfiolio theory, some sort of diversifaction theory. And if that’s true that might work. I  don’t actually believe that to be true. I think the real reason people spray and pray in their investing, is that they're lacking in any conviction, and perhaps because they're too lazy to really spend the time to try to figure out which companies what companies are ultimately going to work."

He even went a step further than that, and essentially called the practice immoral.

"One of the reason i don’t like that sort of approach to investing is that I don’t think it's good to treat companies as lottery tickets. I think its terrible to treat the founders of companies as lottery tickets, and I think it's not just sort of not a bad thing morally to treat people as lottery tickets, I also think it's really bad as an investor. As an investor, once you say that there's a small probability of  a big payoff, small number times big number normally equals a small number. So once you're thinking in lottery ticket terms, you've already psyched yourself into writing checks without thinking and, therefore, losing money. And so I think the anti-lottery ticket approach is to try to be concentrated because that forces you to have high levels of conviction before you write a check of any size and then I think you'll do much better."

Elsewhere in the interview, Thiel was asked about what he sees as the biggest tech trends defining the future, and once again gave a peak into his investing strategy. 

"I don’t like talking in terms of tech trends because I think once you have a trend you have many people doing it, and once you have many people doing something you have lots of competition and little differentiation. You generally never want to be part of a popular trend. You do not want to be the fourth online pet food company in the late 90s, you did not want to be the tenth solar company in the last decade and you don’t want to be the nth company of any particular trend. So I think trends are often things to avoid," Thiel said.

Instead, he prefers a "sense of mission, that you're working on unique problem that people are not solving elsewhere."

An example of this that he gave is SpaceX.

"When Elon Musk started SpaceX, they set out the mission to go to Mars. You may agree or disagree with that as a mission statement, but it was problem that was not going to be solved outside of Space X, and all the people working there knew that and it motivated them tremendously," he said. "So I think unique missions are much to be perfered over trends. It is because every moment in technology happens only once and its always a unique constellation of technologies and people and the world, where the time is right, right now, for a new kind of thng to come about."

(Image source: forbes.com)

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Peter Thiel

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Managing Partner, Founders Fund