Warren Buffett_ How Many Stocks Should You Own In Your Portfolio

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00:00If someone in your local town owned 3 to 5 different businesses, say a cake shop, maybe

00:06a dry cleaner, you'd probably say that they're a pretty well diversified business person.

00:11Yet when it comes to investing in the stock market, experts suggest holding upwards of

00:1520 to 30 different holdings.

00:17Now in today's video I'll share with you guys a clip where Buffett shares his insights

00:20on diversification.

00:21I'm curious what your guys' thoughts are on this topic, so leave a comment down below

00:25on how many stocks you think you should hold in your portfolio.

00:28If you guys enjoy this video be sure to give it a thumbs up and I hope you enjoy the quick

00:32clip.

00:33My name is Mark Hake, I'm from Scottsdale, Arizona and I am very interested in your policies

00:41on diversification and also how you concentrate your investments.

00:46And I've studied your annual reports going back a good number of years and there's been

00:52years where you had a lot of stocks in your marketable, equitable securities portfolio and

00:58there was one year where you only had three in 1987.

01:03So I have two questions.

01:05Given the number of stocks that you have in the portfolio now, what does that imply about

01:10your view of the market in terms of is it fairly valued, that kind of idea?

01:15And second of all, whenever you, it seems that whenever you take a new investment, you never

01:21take less than about 5% and never more than about 10% of the total portfolio with that new

01:28position.

01:30And I wanted to see if I'm correct about that.

01:32Yeah.

01:33Well, on the second point, that there, that really isn't correct.

01:35We, we have positions which you don't even see because we only listed the ones above 600

01:40million in the last report.

01:41And obviously those are all smaller positions.

01:44Sometimes that's because they're smaller companies and we couldn't get that much money.

01:49And sometimes it's because the prices moved up after we bought them.

01:52And sometimes it's because we're, we may be selling the position down even.

01:55But so we have no, there's nothing magic.

01:58We like to put a lot of money in things that, that we feel strongly about.

02:02And that gets back to the diversification question.

02:07We, we think diversification is, as practice generally, makes very little sense for anyone

02:17that knows what they're doing.

02:19They, diversification is a protection against ignorance.

02:23I mean, if you want to make sure that nothing bad happens to you relative to the most of the

02:28market, you own everything.

02:29There's nothing wrong with that.

02:30I mean, that, that is a perfectly sound approach for somebody who, who does not feel they know

02:35how to analyze businesses.

02:36If you know how to analyze businesses and value businesses, it's crazy to own 50 stocks or

02:4240 stocks or 30 stocks probably.

02:45Because there aren't that many wonderful businesses at, that are understandable to a single human being

02:52in all likelihood.

02:53And it, and to have some super wonderful business and then put money in number 30 or 35 on your

02:59list of attractiveness and, and forego putting more money into number one just strikes Charlie

03:04and me as, as, as madness.

03:06And it's, it's conventional practice and it, it, it may, you know, if all you have to achieve

03:12is, is average.

03:13It, it's, it's, it may preserve your job, but it's, it's a confession in our view that

03:21you don't really understand the businesses that you own.

03:24You know, I base, I mean, on a personal portfolio basis, you know, I own one stock, you know, but

03:29it's a business I know and it, and it leaves me very comfortable.

03:33So, you know, do I, do I need to own 28 stocks in order, you know, have proper diversification,

03:39you know, be nonsense.

03:43And within Berkshire, I could pick out three of our businesses and I would, I would be very

03:50happy if they were the only businesses we owned and I had all my money in Berkshire.

03:53Now I love it, the fact that we can find more than that and that we keep adding to it.

03:58But three wonderful businesses is, is more than, is more than you need in this life to

04:05do very well and the average, the average person isn't going to run into that.

04:11I mean, if you look at how the fortunes were built in this country, they weren't built out

04:16of a portfolio of 50 companies.

04:17They were, they were built by someone who, who identified with this, with a wonderful

04:23business.

04:24Coca-Cola is a great example.

04:25A lot of fortunes have been built on that.

04:27And there aren't 50 Coca-Colas.

04:29You know, there aren't 20, if there were, it'd be fine, we could all go out and diversify

04:34like crazy among that group and, and get results that would be equal to owning the really wonderful

04:38one.

04:39But you're not going to find it.

04:41And, and the truth is you don't need it.

04:43I mean, if you, if you had, a really wonderful business is very well protected against, against

04:49the vicissitudes of the economy over time and, and, and the competition.

04:54I mean, you know, we're talking about businesses that are resistant to effective competition.

05:00And three of those will be better than a hundred average businesses at, and, and they'll be

05:06safer incidentally.

05:07I mean, they, they, there is less risk in owning three easy to identify wonderful businesses

05:13there, than there is in owning 50 well-known big businesses.

05:19And it's amazing what has been taught over the years in finance classes about that.

05:25But I can assure you that, that I would rather pick, if, if I had to bet the next 30 years

05:38on the fortunes of, of my family that would be dependent upon the income from a given group

05:44of businesses, I would rather pick three businesses from those we own than own a diversified group

05:48of 50.

05:49Charlie?

05:50Yeah.

05:51What he's saying is that much of what is taught in modern corporate finance courses is

05:58twaddle.

05:59Do you want to elaborate on that, Charlie?

06:15You cannot believe this stuff.

06:18I mean, it's a modern portfolio theory and, oh yeah, it's, it's.

06:26It has no utility.

06:27I mean, it, it, you know, it will tell you how to do average, but you know, I, I, I think

06:32anybody can figure out how to do average in fifth grade.

06:34I mean, it, it's just not that difficult.

06:36And it's, it's elaborate and, you know, there's lots of little Greek letters and all kinds of

06:41things to make you feel that you're in the big leagues, but it, there is no value added.

06:46I have great difficulty with it because I am something of a student of dementia and I

06:53have, and I can ordinarily classify dementia, you know, on some theory structure of models,

07:03but the modern portfolio theory, it involves a type of dementia I just can't even classify.

07:09Something very strange is going on.

07:16If you find, if you find three wonderful businesses in your life, you'll get very rich.

07:20And, and if you understand them, bad things aren't going to happen to those three.

07:25I mean, that, that's the characteristic of it.

07:28By the way, maybe that's the reason there's so much dementia.

07:31If you believe what Warren said, you could teach the whole course in about a week.

07:38Yeah.

07:39Yeah.

07:40And the high priest wouldn't have any edge over the lay people.

07:43And that, that never sells well.

07:45Right.

07:46Not because of it.

07:47Yeah.

07:48Yeah.

07:49Yeah.

07:50Yeah.

07:51Yeah.

07:52Yeah.

07:53Yeah.

07:54That's great.

07:55Yeah.

07:56Yeah.

07:57Yeah.

07:58Yeah.

07:59Hey, you may be getting older.

08:00Yeah.

08:01Yeah.

08:02Yeah.

08:03Yeah.

08:04Yeah.

08:05Yeah.

08:06Yeah.

08:07Uh.

08:08No, no, no.

08:10Yeah.

08:12Yeah.

08:13Yeah.

08:13Oh, yeah.

08:14That's okay.

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