Power Law Kills Diversification Logic

"•Do not diversify excessively. We believe in concentrating our holdings in a limited number of companies in the belief that we will have a chance at superior results only if we take risks intelligently. Good investment ideas are rare and when we find one, we prefer to make"

"Only by getting the big decisions right can investment performance be maintained, so small positions … have virtually no impact on the portfolio as a whole and consume a great deal of research time."

"This highly uneven pattern is not unusual: we see it in all our other funds as well. The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined"

"This is because venture returns don’t follow a normal distribution overall. Rather, they follow a power law: a small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place."

"you must remember the power law to operate it well. The most important things are singular: One market will probably be better than all others, as we discussed in Chapter 5. One distribution strategy usually dominates all others, too—for that see Chapter 11. Time and decision-making themselves follow a power law, and some moments matter far more than others—see"

"Our results at Founders Fund illustrate this skewed pattern: Facebook, the best investment in our 2005 fund, returned more than all the others combined. Palantir, the second-best investment, is set to return more than the sum of every other investment aside from Facebook."