How many of your stocks are based in California? (And is that a bad thing?)
Here’s an idea: Go through your portfolio and find where all your stocks are. If it’s a high-tech country like mine, one state will pop up again and again: California.
In my own portfolio which includes names like Apple, The trading post, Intuitive surgery, Airbnb, Roku, Doximity, Unit Software, PayPal, disney, and much more. About half of the stocks in my portfolio belong to companies headquartered in California.
Why are so many of my actions based in one state? And is this a problem that needs to be solved? We’ll take a look.
California is home to the venture capital industry and Silicon Valley
The reason Disney calls California home is obvious: Hollywood is famous for its movie production. It is therefore logical that a large film studio is established there. Why so many tech companies are based in California is perhaps less obvious. I think it may have to do with the other big industry in California: venture capital. Tech startups need seed capital, so if you want to start a new business, you can go where the money is.
Silicon Valley is also based in California. In the 1940s and 1950s, the dean of Stanford’s engineering department, Frederick Terman, encouraged his faculty to start their own businesses in the area. Hewlett-Packard started out that way. Silicon Valley is where the computer chip was invented. Two major venture capital firms, Kleiner Perkins and Sequoia Capital, started up next to the Stanford campus.
This is why today so many technology companies are based in the region. Hewlett Packard was created in Palo Alto. Intel was created in Santa Clara. Larry Page and Sergey Brin, the founders of Alphabet (parent of Google), were students at Stanford. Mark Zuckerberg, who was a student at Harvard, co-founded his company Metaplatforms (formerly Facebook) in Menlo Park.
If you’re a tech investor, you’ve probably heard of small California cities like Sunnyvale, Redwood City, Mountain View, Palo Alto, Menlo Park, and Cupertino. They are all located in Silicon Valley. Sunnyvale is the birthplace of Atari and the video game industry.
Technology often requires collaboration. It is therefore natural that the hubs develop. Over many decades, Silicon Valley has become a key hub for technology companies and a major location for companies working in software, hardware, internet and blockchain technology.
Is too much Cali action a bad thing?
One of the dangers of investing is the lack of diversity. So there can be a risk if your portfolio contains too many tech stocks. And there is also a risk of geographic concentration. For example, suppose a major earthquake hits California. It could do a lot of damage. It is estimated that an earthquake in or around San Jose could cost over $1 billion in repairs and replacements.
Another problem is politics. California is largely a one-party state, run by Democrats. Some people on the left are hostile to big business and think they should be heavily regulated and taxed. So while there are certainly upsides for tech companies operating in California, there could also be headwinds. Recently, two large companies, You’re here and Charles Schwabmoved their headquarters from California to Texas.
Other companies, like Coinbase and To block, have recently moved from their California headquarters to “headquarters free”. Coinbase ditched San Francisco and decided its business was now “totally remote”. Block does the same. Twilio is closing its San Francisco office as it transitions to a “remote-first” environment. PayPal is also closing its San Francisco site.
Some of these may be specific to San Francisco and reports of increased crime and homelessness in the city. For investors, this is largely not a problem. Businesses can and will relocate if necessary. And the rise of remote working arguably makes the location of a company’s headquarters largely irrelevant.
The value of diversity
I think it’s important for investors to consider diversity when making investments. In particular, I think it’s important to have investments in several different vertical markets. If you only own tech stocks, your portfolio can take a hit in any “tech wreck” in the stock market. So it’s a good idea to own healthcare or finance or other types of businesses.
Geographic diversity is also important. It might be good to think seriously about the political situation. For example, I avoid investing in stocks based in mainland China because that country is ruled by autocratic dictators.
In the United States, the political climate is much less relevant. If a particular state becomes hostile to a business, the business can quite easily take over and move to another state. And with remote work, we are seeing more and more decentralization. So while many of my stocks are based in California, for now I think the positives outweigh the negatives. So I think any danger of having too many California-based stocks is remote (in part because many tech companies are now remote).