Buffett: Concentrate you investments, not diversify! October 23, 2008Posted by shaferfinancial in Uncategorized.
Tags: Ben Graham, Charlie Munger, concentration stock investing, Microsoft millionaires, stock diversification, Value Investing, Warren Buffett
Regular readers know I don’t like mutual funds for several reasons. But, the #1 reason is that they diversify away the opportunities for great rates of returns. Warren Buffett and Charlie Munger (Buffett’s right hand man) agree we me. They ask the question, Once you have identified companies that you believe are fundamentally sound, of good value, and look strong going forward, why buy the twentieth best on your list? Buy as much as you can of your top five or ten! Buffett believes that if you have an opportunity to buy into a wonderful company, with great management at a good price, then load up as much as you can!Buffett’s teacher, Benjamin Graham also did the same making the majority of his fortune in GEICO Insurance holdings! The data on wealthy people demonstrates the same strategy with highly concentrated investments in businesses (sometimes the result of founding the business, sometimes being one of the largest outside shareholders).
If you know that you are going to concentrate on a few companies, it encourages you to focus hard and make unemotional decisions! Psychologically it does the opposite of what passive investing in mutual funds does. What if all those Microsoft millionaires sold their Microsoft stock as soon as they were vested? They would be unhappy campers now!!!! The examples are endless of people becoming wealthy by concentrating their investments!