Warren Buffett is rightly regarded as one of the most brilliant investors to ever walk the planet. With his late business partner, Charlie Munger, the Sage of Omaha has managed to create one of the largest companies in the world purely through his stock-picking prowess.
Part of Buffett’s appeal also lies in the fact that he’s been so open about his investment strategy, thus inspiring countless others to grow their wealth.
However, there’s one ‘rule’ he has used over the years that I’d never consider adopting myself.
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Don’t diversify
One reason for Buffett and Munger accumulating so much wealth over the years is their strategy of only holding a handful of investments.
This idea of being very selective when buying stocks works wonderfully if — as is the case with Buffett — most go on to perform incredibly well. Combine this with his penchant for investing ‘forever’ and it becomes easier to understand how he has managed to accumulate a net worth of around $120bn.
At this point, we’d think Buffett might be a little more cautious. But a glance at Berkshire’s portfolio shows that he adheres to this rule as much now as he ever did. Tech titan Apple takes up almost 50% of the entire portfolio. A significant amount of cash is also devoted to (very long-term holdings) American Express and Coca-Cola.
Mere mortals
To be clear, I think Buffett’s approach is a great idea for life in general. None of us have more than 24 hours in a day, after all. Some degree of focus is essential.
The issue is that I don’t think I can — or should — attempt to replicate this when it comes to my own investing.
Brilliant though he is, Buffett is also an anomaly. He spends most of his days just reading and thinking. And while I’m sure he still faces his fair share of challenges (especially at 93 years of age), I doubt he has quite as many demands on his time as the average mortal.
This is not to say that I can’t enjoy researching companies. However, I will always lack Buffett’s resources.
Seen from this perspective, I think it would be reckless for me to own and operate a very concentrated portfolio. Indeed, the fact that I don’t has kept my ISA chugging along in 2023, despite suffering a couple of painful casualties along the way.
If I’d invested like the great man and picked the wrong shares, it could have been very different.
Safety in numbers
To be fair to Buffett, he has frequently stated that the most suitable investments for the vast majority of people (especially those who have no interest in stock markets) are index funds. Why? Because he recognises just how tricky it is to beat the market consistently, not to mention how powerful the forces of greed and fear are. As he put it: “Do as I say, not as I do“.
Personally, I like to adopt a hybrid approach. In contrast to Buffett, a fair dollop of my cash is in a diversified basket of individual stocks. An big dollop is invested in index trackers too. I don’t see any reason to radically alter my approach in 2024.
Spreading my money around may lead to lower returns, but it will also allow me to sleep at night.
