Here's an idea: Go through your portfolio and look up where are all your stocks are based. If it's tech heavy like mine, one state is going to pop up over and over again: California.
In my own portfolio that includes names like Apple, The Trade Desk, Intuitive Surgical, Airbnb, Roku, Doximity, Unity Software, PayPal, Disney, and many more. About half of the stocks in my portfolio are in companies headquartered in California.
Why are so many of my stocks based in one state? And is this a problem that needs fixing? Let's take a look.
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California is home to the VC industry and Silicon Valley
It's obvious why Disney makes California its home -- Hollywood is famous for its film production. And so it makes sense for a major film studio to be located there. It's perhaps less obvious why so many tech companies are based in California. I think perhaps it's related to California's other major industry: venture capital. Tech startups need seed capital, so if you want to create a new company, you might go where the money is.
Silicon Valley is based in California, too. Back in the 1940s and 1950s, the dean of Stanford's engineering department, Frederick Terman, encouraged his faculty to start their own companies in the area. Hewlett Packard got its start this way. Silicon Valley is where the computer chip was invented. Two major VC firms, Kleiner Perkins and Sequoia Capital, started up adjacent to the Stanford campus.
This is why today so many tech companies are based in the area. Hewlett Packard was started 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 Meta Platforms (formerly Facebook) in Menlo Park.
If you're a tech investor, you've probably heard of tiny cities in California like Sunnyvale, Redwood City, Mountain View, Palo Alto, Menlo Park, and Cupertino. These are all located in Silicon Valley. Sunnyvale is the birthplace of Atari and the video game industry.
Technology often requires collaboration. So it's natural for hubs to develop. Over many decades, Silicon Valley has become a critical hub for tech companies and a major location for companies working in computer software, hardware, the internet, and blockchain technology.
Is too many Cali stocks a bad thing?
One of the dangers in investing is lack of diversity. So it might be a risk if your portfolio has too many tech stocks. And there is a risk in geographical concentration as well. For instance, suppose a major earthquake hits California. That could do a lot of damage. It's estimated that a quake in or around San Jose might cost more than $1 billion in repair and replacements.
Another problem is politics. California is largely a one-party state, ruled by Democrats. Some people on the left are hostile to large corporations and believe they should be highly regulated and taxed. So while there are certainly benefits for tech companies operating in California, there might also be headwinds. Recently two large companies, Tesla and Charles Schwab, have moved their headquarters from California to Texas.
Other companies, like Coinbase and Block, have recently gone from having their headquarters in California to having "no headquarters." Coinbase abandoned San Francisco and decided its business is now "wholly remote." Block is doing the same. Twilio is closing its San Francisco office as it transitions to a "remote-first" environment. PayPal is also closing its San Francisco location.
Some of this may be specific to San Francisco and reports of rising crime and homelessness in the city. For investors, this is largely a nonissue. Companies can and will move if it becomes necessary. And the rise of remote work is arguably making 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 market verticals. If all you own are tech stocks, your portfolio can take a massive hit in any "tech wreck" in the stock market. So it's a good idea to own some healthcare or financials or other types of businesses.
Geographic diversity is important, too. It might be a good idea to think hard about the political situation. For instance, I avoid investing in stocks based in mainland China because that country is ruled by autocratic dictators.
In the U.S., the political climate is much less relevant. If a particular state becomes unfriendly to a company, the business can fairly easily pick up 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 from having too many stocks based in California is remote (in part because many tech companies are now remote).
