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Lessons From Warren Buffett: Diversification Makes Very Little Sense, If You

Diversify your portfolio. It is a bedrock tenet that gets preached over and over. However, to Buffett, if you know what you are doing, that doesn’t make sense. Why? Because there are only a limited number of great companies that are worth owning. So, why do people do it? “Diversification is a protection against ignorance,” Warren Buffett says. However, he notes that its not the secret to great wealth. As he points out, “If you look at how the fortunes were built in this country, they weren’t built out of a portfolio of fifty companies.”

“We think diversification is, as practiced generally, makes very little sense for anyone that knows what they’re doing,” Warren Buffett said at the 1996 Berkshire Hathaway Annual Meeting. “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 is a perfectly sound approach for somebody 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 fifty stocks or forty stocks or thirty stocks, probably, because there aren’t that many wonderful businesses that are understandable to a single human being, in all likelihood. And to have some super-wonderful business and then put money in number thirty or thirty-five on your list of attractiveness and forego putting more money into number one, just strikes Charlie and me as madness.”

Buffett’s full explanation on diversification

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© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.