How Important Is Diversity?

Warren Buffett, famed investor and 2nd wealthiest man in the world, is always one to share his thoughts with you. He took Berkshire Hathaway, which started as a textile firm, and built it up to be a mega conglomerate worth about $400 billion through many years of strategic investing. He is constantly asked by hopeful investors what stocks they should be looking toward to invest in, what strategies they should use to find businesses, and even how diverse their own portfolio should be.

For the questions on diversity, let’s take a glimpse into Buffett’s portfolio. It’s easy to see what lies in his circle of competence; his portfolio is made up with 37% consumer staple companies, 32% financial institutions, 13% information technology, and the other 18% with various energy, health care, and telecommunication companies. 

Even with the glimpse into Buffett’s personal portfolio, I was still interested in what he had to say on the lack of diversity.

“I have two views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, participate in total diversification. The economy will do you fine over time.”

At first, I thought this was contradictory to Buffett’s strong stance on only investing on what is in your circle of competence. He had said that having a lot in your circle was not important, but knowing the edge of it definitely is. But, I think this is another instance where Buffett thinks the American economy will even things out.

“I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month— or a year— from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.”

Buffett has never been one to encourage investing for short-term profit. Rather, he thinks that if you’re not “in the investing game” you should fully diversify your portfolio and let the economy and the stock market do the work for you. Even then, though, you should be careful and try to follow his filters for investing. Once you feel like you’re becoming more professional and are developing a circle of competence, you can start to zero in on that.

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