When investing, one of the most common advice we get is to diversify. However, many investors like Warren Buffett and Charlie Munger do not diversify. In this video, I’ll explain why and try to debunk the common misconception that you should diversify.
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0:00 – Intro
1:03 – How the pros portfolios look like
2:08 – Concentration builds wealth
Warren Buffett once said, “Diversification may preserve wealth, but concentration builds wealth”. The main reason you would want to diversify is to lower the risk on your portfolio. But the more you diversify, the lower your returns will be. So, it really depends what’s your goal in investing, do you just not want to lose? Or do you want to get higher returns? If so, you would need to concentrate your investments on only the best performing stocks.
4:08 – Protection Against Ignorance
Warren Buffett recommends the average investor to buy index funds. But for people who knows how to value and analyze businesses, it’s a very bad move to own so many stocks, because the truth is, there aren’t that many good companies at all. An average investors most likely wouldn’t have been able to spot the good companies, there’s a much higher chance to choose the wrong companies. For them, the best way is to diversify and protect yourself against your own ignorance, in Warren Buffett words.
6:24 – Not Really Diversified
When times are good, your portfolio will seem diversified. But when times are bad, all stocks will be affected. Industries that are not related will mostly do badly. The real way to diversify is to invest in different asset classes, like the All Weather Portfolio By Ray Dalio, which has a mixed of stocks, bonds, gold and commodity.
8:43 – Diversifying Creates Risk
Mark Cuban mentioned that “Diversification is for idiots, you can’t diversify enough to know what you are doing”. If you have so much stocks in your portfolio, you’ll never get to know each of them properly. That by itself has a much higher risk than not diversifying.
10:20 – How To Not Diversify And Still Have Low Risk
Not diversifying is not a strategy for everyone, because if you do it wrongly, you might end up doing worse off. Here’s a few rules to reduce your risk without diversifying:
Invest in companies that continuously innovate
Invest in companies that have a big moat
Avoid companies that has complacent leaders