I have been reading a book on kindle called " University f Berkshire Hathaway: 30 years of lessons learned from Warren Buffet & Charlie Munger". The author has attended every Berkshire annual meeting and summarizes each meeting with things that were said by the two veterans. The book is alright but provides some history since the first few Berkshire meetings…
Around year 1999/2000 there is something interesting that I came across that I wanted to share :
" Buffet noted that he likes to put a lot of money in things he feels strongly about. Diversification makes no sense for someone who knows what they are doing. “To buy number one on your list equally with number 37 strikes us as madness. Diversification is a protection against ignorance, a confession that you do not know the businesses you own.”
Buffet claimed that three wonderful businesses is more than you need in this life and would serve you much better than 100 average businesses.
Buffet often talks about buying the S&P 500. I believe this advice is meant for the investor who knows little to nothing about the stocks and is a hands off investor or average investor.
He also talks about volatility and how it doesn’t mean anything to him over the time frame (forever) that he invests.
We are not hands off nor average in our returns and should pay less attention to the noise around us and stay focused on the handful of great business that this community has picked out for out sized returns along with volatility (the chance to add to our winners) on the way.
Diworsification as used by Peter Lynch is not buying a large number of stocks but corporate empire building via mergers and acquisitions (M&A) of unrelated business. Buying a large number of non-correlated stocks is the basis of Modern Portfolio Theory (MPT) which I find as crappy as corporate diworsification.
Life is much easer for individual investors than for funds that must manage billions of dollars. The reason these funds exist is because most people don’t know how to or don’t want to manage their own wealth which is not an easy matter, it’s the most difficult thing I have ever had to learn.
The reason these funds exist is because most people don’t know how to or don’t want to manage their own wealth which is not an easy matter, it’s the most difficult thing I have ever had to learn.
And this ties back to Buffet’s support of most investors just using an S&P500 Index Fund: the S&P 500 is a self-adjusting mechanism.
I’ve long believed this. I also believe the number of holdings in my own portfolio, and weighting of each holding, should be in direct correlation with my available time + depth of knowledge in my holdings. We tend to call this “conviction”, but I guess it is conviction + realistic transparency of information.
We have to remember that we are all outsiders. We can’t really know what is going on in boardrooms. I’m sure we have all had a holding head toward zero on us. If you haven’t, I’m sure you will, eventually. I’ve had 2 severe ones in my ~15 years; companies that I was a fan of and brought more than once on the way down, thinking I understood the quality, calling it a sale, and expecting it would come back. There were probably more that did this to some partial extent before I dropped them.
I know I don’t have the time to watch everything every company does, or the interplay between them, to catch patterns and news.
…How this translates in to number of holdings is up to each individual, and a debate I’d rather avoid. I only replied to point out that this concept is at work in each of us here and worth a little introspection from time-to-time to be sure we are each being honest with ourselves and not losing our balance by going to far in any direction.