My Favorite Investment Lesson From Warren Buffett | Smart Change: Personal Finance

(Bram Berkowitz)

Warren Buffett – At 91 years old, he is still the CEO of Berkshire Hathaway One of the greatest investors of our time. The conglomerate’s shares produced a compound annual return of more than 20% between 1965 and 2021, compared to just 10.5% for the return. Standard & Poor’s 500 during the same period. Much of this outperformance has been driven by its massive equity portfolio, which has also generated outstanding returns over the years.

As a result, investors from all over are studying Buffett’s investing methods, and trying to learn to think like he does. Over the decades, he’s shared a lot of tips on how to do this, but one of these tutorials is my favorite.

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diversification? Who needs it?

A common investing theme that you may have heard before is the need to diversify your investment portfolio. To use an older term than the stock market, don’t put all your eggs in one basket.

The idea is that if you buy shares across a range of sectors, it will be hedged against various economic environments and scenarios. For example, while tech stocks and growth did very well in 2021, they have crashed this year. If you also own oil and natural gas stocks, you will have winners this year to help you offset the damage you’re taking in technology. In addition, diversification allows you to better take the hit if one of the companies in your portfolio is already struggling.

But Buffett has long been a critic of too much diversification. He once said, “Diversification is protection from ignorance.” “It makes no sense if you know what you’re doing.”

Obviously, he still follows his mantra. After all, nearly 65% ​​of Berkshire’s stock portfolio, which is now worth about $314 billion, is invested Only four sharesand about 39% of it is invested in just one company: the country’s largest public company, apple.

Buffett’s thesis is that if you do enough good research, you can take smartly calculated risks and buy stocks with attractive valuations that will reward patient investors in the long run. He also believes that once you do the work, if you see a great opportunity, you should be big, not small.

Think about what’s in your wallet today. Do you feel better about the stocks you invested in after doing the minimal research or the ones you spent days and weeks investigating?

When it comes to stocks you’ve researched further, you likely know every aspect of their business, and you’re also likely to consider how they would perform in a negative scenario or a widespread recession. I bet you are less concerned with how well researched stocks are performing at the moment, and more confident that they will bounce back and produce solid returns in the end.

Should diversification be abandoned?

Now, I don’t think Buffett was telling the common investor to completely give up on diversification, and I don’t think you should either if you like the strategy. The truth is, few of us have anywhere close to Buffett’s experience as an investor, and most of us don’t spend many of our working days researching stocks. And Buffett is investing hundreds of billions of dollars on behalf of a huge conglomerate, and he has opportunities that the rest of us lack. He also has many stakeholders that he must answer. You, as a small retail investor, need to manage your portfolio in the way that works for you. Diversification is a proven concept and can still generate significant returns in the long run.

But I like Buffett’s approach to diversification because I think the more comprehensively you research your stocks before buying them, the better those you pick will perform. You’ll also feel more confident about those stocks, which will allow you to sleep better at night, especially during tough market conditions like the one we’re going through this year.

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Bram Berkowitz He has no position in any of the mentioned shares. Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B stock). Motley Fool recommends the following options: long January 2023 calls worth $200 on Berkshire Hathaway (B stock), March 2023 long calls $120 on Apple, short January 2023 calls of $200 on Berkshire Hathaway (B stock), short calls Short calls in January 2023 $265 on Berkshire Hathaway (B), short calls in March 2023 of $130 on Apple. Motley Fool owns a profile Disclosure Policy.