“Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong.” ~ Sir John Templeton
Billionaire investor Warren Buffett isn’t a big fan of diversification. Buffett has nearly 68% of Berkshire Hathaway’s $361 billion portfolio invested in only four stocks.
It’s important to note that Berkshire Hathaway owns over 40 stocks. However, four stocks— in addition—Apple, Bank of America, American Express, and Coca-Cola—comprise the lion share of his stock portfolio. Essentially, he believes in their businesses. He explained, “When you find a truly wonderful business, stick with it.”
Buffett wasn’t always so heavily invested in these stocks. Coca-Cola and American Express are his two longest-held positions. The stocks have increased so much in value through the years that they’ve become a bigger part of Berkshire’s portfolio.
In 1998, Buffett summarized his philosophy about diversification: “If you really know businesses, you probably shouldn’t own more than six of them. If you can identify six wonderful businesses, that is all the diversification you need, and you’re going to make a lot of money.”
You might follow Buffett’s lead and invest heavily in a small number of stocks only if you can meet the two criteria he specified:
- Have a thorough understanding of their underlying businesses.
- Find “wonderful businesses.”
However, Buffet did say: “If you are not a professional investor, if your goal is not to manage money in such a way so you get a significantly better return than the world, then I believe in extreme diversification.”
In other words,. Diversification is a good thing for most retail investors.
One important fact:
If you had invested $10,000 in the S&P 500 in 1964, your investment would have grown to approximately $3.1 million by now, reflecting a total return of around 31,223%.
On the other hand, the same $10,000 investment in Berkshire Hathaway would have skyrocketed to an astounding $438.5 million, with a total return of about 4,384,748%.
This dramatic difference highlights Berkshire Hathaway’s exceptional performance under Warren Buffett’s leadership, significantly outpacing the broader market.
Source:
- https://finbold.com/this-is-how-berkshire-hathaway-has-outperformed-sp-500-since-warren-buffet-took-over/
- Keith Speights, Why Warren Buffett Has 68% of Berkshire Hathaway’s $361 Billion Portfolio Invested in Only 4 Stocks, Motley Fool, April 21, 2024. https://www.fool.com/investing/2024/04/21/warren-buffett-berkshire-hathaway-portfolio-stocks/