“The fewer Stocks, the Better” - Warren Buffett | Berkshire Hathaway | Investment

Summary

In a video by The Financial Economics, Warren Buffett discusses the idea that diversification, as practiced generally, makes little sense for those who know how to analyze businesses. Instead of owning numerous stocks, he advocates for focusing on a few, high-quality businesses that one truly understands. Buffett explains that such businesses are more secure and provide better returns than a diversified portfolio of average companies. He also criticizes modern portfolio theory, claiming it lacks utility and is unnecessarily complex. Overall, Buffett emphasizes the value of identifying and concentrating on exceptionally great businesses rather than spreading investments too thinly.

Highlights

• Warren Buffett believes that diversification often signals a lack of understanding of companies 🤔
• It's better to invest heavily in a few excellent businesses than spread money over many mediocre ones 💸
• Buffett notes that many fortunes are built on just a few wonderful companies, like Coca-Cola 🥤
• The wisdom shared challenges conventional financial teaching on portfolio management 🎓
• Buffett and Munger humorously critique modern portfolio theory and its complexity 🤣

Key Takeaways

• Diversification is protection against ignorance, says Warren Buffett 🛡️
• Owning fewer, high-quality stocks is better than many average ones 📈
• Three great businesses can be safer and more profitable than a broad portfolio 💼
• Warren prefers focusing investments on businesses he deeply understands 🤓
• Much of modern portfolio theory is seen as twaddle by Buffett and Munger 📚

Overview

Warren Buffett offers his unique perspective on investment strategy in this insightful video. He challenges the conventional wisdom that suggests extensive diversification is necessary for safeguarding one's portfolio. According to Buffett, diversification as commonly practiced, serves more as a protection against ignorance rather than a sound investment strategy. For those who understand how to analyze and value businesses, focusing on a few top-notch, easy-to-understand companies is the key to success.

In the discussion, Buffett uses the example of Coca-Cola to illustrate how many significant fortunes were built by investing in a limited number of excellent businesses. Contrasting this view, he points out that it’s nearly impossible to find a large number of such companies, which makes heavy diversification unnecessary. He explains that owning a couple of amazing companies is far more effective and less risky than holding a broad mix of ordinary ones.

Buffett's ideas are counter to much of what is taught in modern corporate finance courses. He, alongside Charlie Munger, humorously discredits the complexities of modern portfolio theory, suggesting it's largely theoretical nonsense with little practical utility. Their candid remarks serve as a reminder that true investment success hinges on understanding and investing in a select few great companies.

“The fewer Stocks, the Better” - Warren Buffett | Berkshire Hathaway | Investment Transcription

• 00:00 - 00:30 we think diversification is as practice generally makes very little sense for anyone that knows what they're doing uh they diversification is 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 that that is 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
• 00:30 - 01:00 it's crazy to own 50 stocks or 40 stocks or 30 stocks probably uh because there aren't that many wonderful businesses at that are understandable to a single human being in all likelihood and it and to have some super wonderful business and then put money in number 30 or 35 on your list of attractiveness and and forego putting more money into the number one just strikes Charle in me as as Madness and it's conventional practice and
• 01:00 - 01:30 it it may uh you know if all you have to achieve is is average U it it's uh it it's May preserve your job but it's it's a confession in our view that you don't really understand the businesses that you own um you know I Bas I mean on a personal portfolio basis you know I own one stock you know but it's a business I know it and it leaves me very comfortable H so you know do I do I need to own 28 stocks in order you know have proper diversification you know uh be
• 01:30 - 02:00 nonsense and within birkshire I could 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 is more than uh it's more than you need in this life to do very well and uh the average
• 02:00 - 02:30 the average person isn't going to run into that I mean if you look at how the fortunes were built in this country uh they weren't built out of a portfolio 50 companies they were they were built by someone who who uh identified with this with a wonderful business Coca-Cola is a great example a lot of Fortunes have been built on that and there aren't 50 coca-colas you there aren't 20 if there were it'd be fine we could all go out and diversify like crazy among that group and and get results that would be equal to owning the really wonderful one but
• 02:30 - 03:00 you're not going to find it and uh and the truth is you don't need it I mean if if you have a really wonderful business is very well protected against against the vicissitudes of the economy over time and and and competition I mean you know we're talking about businesses that are resistant to effective competition and three of those will be better than 100 average businesses uh uh and and they'll be safer incidentally I mean they there is less risk in owning three
• 03:00 - 03:30 easy to identify wonderful businesses there than there is in owning 50 uh well-known big businesses and uh uh it's amazing what has been taught over the years in finance classes about that but uh uh I can assure you that that uh I would rather pick if if I had to bet the next 30 years on the fortune of uh of my family
• 03:30 - 04:00 that would be dependent upon the income from a given group of businesses I would rather pick three businesses from those we own than on a diversified group of 50 Charlie yeah what he's saying is that much of what is taught in modern corporate finance courses is [Applause] twaddle do you want to elaborate on that
• 04:00 - 04:30 [Laughter] Charlie you cannot believe this stuff I mean it's a modern portfolio Theory and yeah it's it's it has no utility but I mean it it you know it will tell you how to do average but you know I I I I think uh anybody can figure out how to do average in fifth grade I mean it it's just not that difficult and it's it's elaborate and you know there's lots of Little
• 04:30 - 05:00 Greek letters and all kinds of things to make you feel that you're in the big leagues but it uh there is no value added I have great difficulty with it because I am something of a student of dementia and I have we hang around a lot together I get ordinarily classified dementia you know on some uh Theory structure of models but the modern portfolio Theory uh it involves the type of dementia I just even
• 05:00 - 05:30 classify something very strange is going on if you find if you find three wonderful businesses in your life you'll get very rich and and if you understand them bad things aren't going to happen to that those three I mean that that's the characteristic of it uh by the way maybe that's the reason there's so much dementia if you believe what Warren said you can teach the whole course in about a week yeah
• 05:30 - 06:00 yeah and the high priest wouldn't have any Edge over the lay people and that that never sells well right