Trying to Understand Why Warren Buffett is Against Diversification

Trying to Understand Why Warren Buffett is Against Diversification

Even investor Mark Cuban thinks that diversification is for idiots.

And Warren Buffett, the greatest investor of all time says this… Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

And here’s the video that discusses diversification in a bit more detail.

Turning My Investing Strategy Upside Down…

Basically, the thought against diversification is that if you know what you’re doing, you shouldn’t have to diversify. Diversification is admitting that you don’t really know what you’re doing and that you are basically buying a bunch of stocks in the event one or more of them head South!

I can see that logic there…

But Warren Buffett goes on to say that if you did your homework and studied the companies you are investing in, then you have better certainty that you have a winning company, and you would just keep buying more shares of that company to accumulate your holdings in that company.

This sort of shakes the foundations of what I’ve read from several books and reliable sources on the web, that diversification is key to building a successful portfolio.

But throwing diversification out the window means having to rethink one’s strategy. And, Warren Buffett might have some 50+ stocks in his portfolio, and diversification was not the goal to amassing such a big portfolio, and according to him it’s about investing in great companies with a lot of intrinsic value but are undervalued. And also more about investing in companies that have a ‘bigger moat’ that would protect these companies against competition.

Rethinking the Strategy

Right now The Fund has 22 stocks. We’ve treated some stocks as long-term investments, while others are for more short-term gains. So, my overall strategies are not just about value investing, and I’ve been known to day and swing trade as well.

I’ll be unthinking my strategy of diversification!

And for long-term investments will be looking more closely at the intrinsic value of companies without the thought of adding it to The Fund as a means of diversification.

It’s so of unlearning what one has learned, and dropping a word that has been in my mind for years… so, don’t think diversification. Just invest in great companies that will maximize success.

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randomguru

Portfolio Manager & Musician

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