Friday, January 8, 2010

Diversification & Warren Buffet

Warren Buffet famously said, "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing." And, “Wide diversification is only required when investors do not understand what they are doing.”

Although Warren Buffet speaks in favor of learning everything you can about prospective investments and only putting your money on your best ideas. Mr Buffet reads annual reports for pleasure. He walks his talk and he is the most successful investor in history.

However, his current stock portfolio consists of the following stock investments – not counting Berkshire-Hathaway’s wholly-owned subsidiaries:

Thirty companies from fifteen industries are represented in this list. It looks pretty diversified to me.

Mr Buffet has a problem that I don’t have though. He has too much money. He must find a place to put billions of dollars; A place that will earn a good return and also not drive the price out of sight by the shear size of his buy order.

I could, if I chose, put every last cent I own into one stock – and no one would notice. Poor Warren just can’t do that. He often buys companies outright – taking them private – because he can’t make a significant (to Berkshire) investment in their stock without taking them over. Right now he is in the process of swallowing Burlington Northern (BNI) whole.

So, it may be that Mr Buffet has inadvertently ended up with a diversified portfolio. But, I doubt it. Warren Buffet is an excellent stock picker. He picks for the Berkshire
If you pick the best company in every industry – you inevitably create a nearly perfectly diversified portfolio. Not a bad approach, if I do say so myself.

Would that I could emulate his results.

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