Warren Buffett Diversification Thoughts

Billionaire Warren Buffett is not a fan of diversification. In fact, he once called diversification “protection against ignorance.” Diversification is for those who do not know what they are doing. If one knows what they are doing in anything, then there will be no need to diversify. Although this is seen as a method of cushioning oneself from unanticipated occurrences, it is not something that Warren Buffett would practice. He says that it is better to take two or three industries, learn everything about them such that you can invest in them without hesitation since you know what will happen to them next. Such action is better than taking stock from too many sectors and filling them on your portfolio. The main aim of diversification is to offset losses made from certain stocks. However, Buffett insists investors do not need to do all of that if they can perfect their understanding of one or two sectors.

The fear in those who advocate for diversification is that pacing all the investment in one sector is flirting with danger in case the sector decides to do the unthinkable. A good example is the technology stocks of the 2000s. Any investor who had placed his or her investment in this sector only was wiped out when the sector was caught up in a bubble. Another example is the Enron Scandal that wiped out the investments of all the investors in the energy sector.

Warren Buffett is of the thoughts that although diversification offsets losses, it also does the same to gains. Gains in one sector are erased by losses in another sector. To be on the safe side in this game of losses and gains, an investor needs to be armed with enough understanding of the stock markets and the financials, such that in case of losses, they know what to do.

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