Buffet And Munger: Diversification With Wonderful Businesses

Warren Buffet and Charlie Munger answer a question about diversification with wonderful businesses at the 1996 Berkshire Hathaway annual meeting.

Warren Buffett Wonderful Businesses

Buffet And Munger: Diversification With Wonderful Businesses

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Transcript

My name is Mark [inaudible] from Scottsdale Arizona and I am very interested in your policies on diversification and also how you concentrate your investments. And I've studied your annual reports going back a good number of years and there's been years where you had a lot of stocks in your marketable equitable securities portfolio. And there was one year you only had three in 1987. So I have two questions. Given the number of stocks that you have in the portfolio now what does that imply about your view of the market in terms of. Is it fairly valued that kind of idea. And second of all whenever you it seems that whenever you take a new investment you never take less than about 5 percent and never more than about 10 percent of the total portfolio. With that new position and I want to see if I'm correct about that on the second point that that really isn't correct.

We have positions which you don't even say because we only listed the ones above 600 million in the last report and obviously those are all smaller positions sometimes. That's because they're smaller companies and we couldn't get that much money. And sometimes it's because the prices moved up after we bought them. Sometimes it's because we may be selling the position down even. But so we have no there's nothing magic we like to put a lot of money in things that we feel strongly about and that gets back to the diversification question. Now we we think diversification is as practiced generally makes very little sense for anyone that knows what they're doing. They diversification as a protection against ignorance. I mean if you want to make sure. That nothing bad happens to you relative to the market you own everything there's nothing wrong with that. I mean as a perfectly sound approach for somebody who who does not feel they know how to analyze businesses if you know how to analyze businesses and value businesses it's crazy to own 50 stocks or 40 stocks or 30 stocks probably because there aren't that many wonderful businesses that are understandable to a single human being in all likelihood and and to have some super wonderful business and then putting money in number 30 or 35 on your list of attractiveness and forgo putting more money into number one just strikes surely and me as madness. And it's conventional practice and it may you know if all you have to achieve is average. It's it's may preserve your job but it's a confession. In our view that you don't really understand the businesses that you own. You know I based on a personal portfolio basis you know I own one stock. You know. But it's a business I know that and it leaves me very comfortable. So. Do I. Do I need own 28 stocks in order to have proper diversification and. The nonsense and within Berkshire I can pick out three of our businesses and I would I would be very happy if they were the only businesses we owned and I had all my money in Berkshire. Now I love it. The fact that we can find more than that and that we keep adding to it but three wonderful businesses is more than more than you need in this life to do very well.

And the average the average person isn't going to run into that I mean 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 they were built by someone who who identified with us with a wonderful business Coca-Cola is a great example a lot of fortunes have been built on that. And there are 50 Coca-Cola as you know there are 20 if there were to be fine we could all go out and diversify like crazy among that group and get results that would be equal to owning the really wonderful one but you're not going to find it.

And and the truth is you don't need it. I mean if you had a really wonderful business is very well protected against against the vicissitudes of the economy over time and the competition. I mean you know we're talking about businesses that are resistant to effective competition. And three of those will be better than a hundred average businesses. And they'll be safer incidentally. I mean they there is less risk in owning three easy to identify wonderful businesses there than there is in owning 50 well-known big businesses. And it's amazing what has been taught over the years in finance classes about that. But I can assure you that that I would rather pick.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and three kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own 2.5 grams of Gold