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.

[KelechIwuaba]

I love the quote of if you only take small chances it will be like you never took the opportunity in the first place

[dakotah]

It’s crazy how articulate and rationale this concept is but yet professional “investors” are always on tv talking about the importance of diversification

[austinbyrd]

This guy is the Athlean-x of the stock market.

[Rainy_Day]

The less you know it’s better to use low-fee indexes, diversify globally and across assets. And the more information that is readily available to the public the less advantage the experts have, so use low-fee indexes.

"Our investment style has been given a name - focus investing, which implies ten holdings, not one hundred or four hundred." Charlie Munger

[kaumallose]

I love value investing and hold it forever

[anthonycantu]

There's no magic bullet, perfect recipe, or infallible methodology for anything. I firmly believe that diversity is what makes this country great, and so it goes with my portfolio. That being said, I may have a bit more of an emphasis on something in my investment portfolio, but, on the whole, I believe that there is strength in numbers. Stocks, a small business, real estate, and the like (each are a separate basket) are a wonderful way to progress, with confidence, on the road towards a financial success. By nature, I don't ever put all my eggs in one basket. I do quite well, thank you!
Mr Buffet has his own path as do we all. I do what is comfortable for me.

[marcs]

Buffet is smart and mungar is really smart. But Peter Lynch is someone who can give life changing advice.

[LuckyLukky]

My brokerage charges super high fees for every “trade” and I purpose stay with it to make me buy and sell less. Great returns so far

[rolandmcnamara]

Excellent advice. Buffett is advice is sound through the ages and he’s success is by no means of an accident. Peter Lynch is also very smart, but is more forthcoming with insights and advice on the stock market

[GammunG]

Thank you for this video. I am new in investing and currently self-learning about financial statement. Hope I can become the next successful investor!!

[mathisnotforthefaintofheart]

Buffett can do whatever he wants. He has plenty of money. For the average Joe, diversification may not be such a bad idea.

[williamc]

Apple stock is one of the largest holdings of Berkshire Hathaway.

[jep]

Being broadly diversified is the most sensible approach for almost everyone. Buffet is wrong however to simply recommend the S&P 500 - that leaves you under diversified as you won’t have exposure to small cap stocks and you also won’t have any international exposure. Just because those companies operate overseas doesn’t mean you have international exposure.

If you believe that researching companies gives you an informational advantage ahead of the market when it is mostly driven by large institutions and high frequency trading firms (which can process the info in a companies financial statements faster than you can blink) then best of luck to you.

[harryallenpearce]

8:00
“The average return of the S&P 500”

You mean the 20 year return that beats 95% of all other investors, including Warren Buffett.

[brendanroy]

Buffet moved away from his stance on Tech stocks and stated it was stupidity early on.
Investors now should definitely be invested with technology. If nothing else invest in the form of a tech index fund

[rubygreen]

Arcc, bgs, SRET, T, eventually O and NEWT are my core holdings and I'm doing something very similar to what is recommended by buffet and it makes sense. After 120k ill diversify more for sure but I need to reach that point first. 20 k in each company atleast.

[tommimetsapuro]

i invested only in one instrument and it was bitcoin and i am happy with that. Now i have two Bitcoin and Ethereum. If i would be interested in stocks i probably would buy Nvidia.

[tixchicken]

it is better to have a concentrated portfolio to grow your wealth

[danieldon]

👋Every Bitcoin investor right now is just smiling at the price of Bitcoin as it held strong and indeed valuable enough to generating good Rol.more persons are gonna become millionaires and we have Bitcoin thanks for that!