Warren Buffett Warns About Diversifying Your Portfolio

In this video, we are going to listen to Buffett describe why he recommends serious and knowledgeable investors should ignore conventional wisdom and purposely have a concentrated portfolio of stocks. Make sure to stick around until the end because you’re going to learn how to apply these concepts Warren Buffett lays out to your own investment portfolio. But first, make sure to like this video and subscribe to the channel because it is my goal to make you a better investor by studying the world’s greatest investors. Without further ado, let’s dive in.

You don’t even have to follow the stock market to know that Warren Buffet is hands down the greatest investor of all time. With that being said, you would think that he has made hundreds or thousands of successful investments throughout his illustrious career. But you may have been surprised to learn that Buffett attributes his remarkable investment success to just a limited number of investments. While Buffett’s company Berkshire Hathaway now owns hundreds of companies and stocks, it wasn’t always that way. When Buffett was younger, he had an extremely concentrated portfolio of stocks. When he was 21 years old, he liked the stock of GEICO so much that he put half of his entire net worth into this one stock.

Conventional wisdom says that an investor should diversify his or her investment portfolio across many stocks in varying sectors of the economy. Investing textbooks and college finance professors say that risk is reduced by spreading your money among a significant amount of stocks. Why does Buffett differ in his approach? From my study of Warren Buffett, which includes reading every essay he has written since 1965 and watching every interview he has given, there are 4 main reasons I point to as to why this strategy of running a concentrated portfolio has worked for Buffett.

The first reason I point to is that Buffett truly views stocks as ownership stakes in businesses and not just pieces of paper that float around in price. Since Buffett truly understands the underlying fundamentals of the business, he is not worried about short term price fluctuations.

That leads me to my second point, Buffett views risk differently than most investors. Conventional investing wisdom views risk as volatility or to put simply, how much a stock price moves up or down. Buffett is different, instead he defines risk as the likelihood of a permanent loss of investment capital due to deterioration in the underlying performance of the business, not short term movements in the company’s stock price.

The third reason is that Buffett invests in company’s when there is a high margin of safety. This means that he is investing in a company only when the price he is paying for a stock is significantly less than the true value of the business. Put another way, Warren Buffett only buys a stock when he is getting it a discount relative to the actual value of the business. This helps him ensure that the probability of his investment being successful is high, meaning he feels more comfortable making a large bet because the likelihood of it working out is high.

The final reason is that Warren Buffett tends to stay away from technology stocks that are susceptible to rapid change due to technology. Because tech companies can easily have their business destroyed due to an unexpected technological shift in society or by a competitor entering the market with a superior technology, the lifespan of tech companies is significantly shorter than non technology businesses, such as a railroad. This makes large, concentrated investments in tech companies risky, because of the higher probability of permanent capital loss. This is why venture capitalists who mainly focus on technology companies spread their investments out over a wide range of companies. They know most of their investments will likely fail but the ones that do work, will more than make up for all the ones that do fail.

source