Warren Buffett and Charlie Munger on Diversification

Full talk here.

  • [Warren] There is no magic. We like to put a lot of money in things that we feel strongly about. [1:20]

  • [Warren]: We think diversification makes very little sense for anyone that knows what they are doing. [1:37]

  • [Warren]: Diversification is a protection against ignorance. If you want to make sure nothing bad happens to you -relative to the market - you own everything. It is a perfectly sound approach for somebody who doesn’t feel they know how to analyze businesses. [1:49] 

  • [Warren]: If you know how to analyze businesses it is crazy to own 30, 40, or 50 stocks. Because there are not that many wonderful businesses that are understandable to a single human being. [2:07] 

  • [Warren]: To have a super wonderful business and then put money into number 30 or 35 on your list of attractiveness and forgo putting more money into number 1 strikes Charlie and me as madness. [2:20]

  • [Warren]: Diversification is a confession that you don’t really understand the businesses you own. [3:00]

  • [Warren]: On a personal portfolio basis I own one stock. But it is a business I know. It leaves me very comfortable. Do I need to own 28 stocks to have proper diversification? It would be nonsense. [3:15] 

  • [Warren]: Three wonderful businesses is more than you need in this life to do very well. If you look at how the fortunes were built in this country they weren’t built out of a portfolio of 50 companies. They were built by someone who identified with a wonderful business. [3:34] 

  • [Warren]: There is less risk in owning 3 wonderful businesses than there is in owning 50 well known, big businesses. It is amazing what has been taught in finance classes about that. [5:00] 

  • [Charlie]: What he is saying is that much is what is taught in modern finance courses is twaddle. [5:20]

  • [Warren]: Modern portfolio theory has no utility. It is elaborate. It has lots of little greek letters to make you feel that you are in the big leagues. But there is no value-added. [6:04]

  • [Warren]: If you find 3 wonderful businesses in your life you will get very rich. [6:51] 

  • [Charlie]: Maybe that is why there is so much dementia [in modern finance classes] if you believe what Warren said you could teach the whole course in a week. [6:57] 

  • [Warren]: Yeah and the high priest wouldn’t have any edge over the laypeople and that never sells well. [7:13]