Warren Buffett: How Many Stocks Should You Own?

Summary

In this video, the Swedish Investor discusses Warren Buffett's approach to stock portfolio diversification. Buffett’s early career featured highly concentrated holdings, but over time, his portfolio expanded to over 40 listed companies. The video outlines key rules for determining the right number of stocks in a portfolio, depending on your knowledge, the risk of your assets, the attractiveness of investment opportunities, and your ability to earn back invested capital. The importance of balancing diversification with focus is emphasized for achieving optimal returns in stock market investing.

Takeaways

• 😀 Diversification reduces risk but can also reduce potential returns if overdone. It’s crucial to find the right balance between risk reduction and maximizing returns.
• 😀 Warren Buffett's early investment career started with a non-diversified approach, with only three stocks in his portfolio at age 11.
• 😀 As Buffett’s career progressed, he diversified slightly but still concentrated his investments heavily in a few select companies.
• 😀 Buffett’s portfolio today includes over 40 listed companies and more than 50 wholly-owned subsidiaries, but it is still relatively top-heavy with a few large positions.
• 😀 Buffett emphasizes the importance of knowing your investments deeply. If you're a 'know-something' investor, owning a large number of stocks may be unnecessary.
• 😀 For investors who are less knowledgeable, index funds are recommended as a safer option, offering diversification without needing expertise in analyzing companies.
• 😀 Diversification is crucial when investing in riskier assets, such as startups, companies in bankruptcy, or industries with a lot of uncertainty.
• 😀 When some investment opportunities are much better than others, Buffett advises concentrating your investments on the best opportunities rather than spreading yourself too thin.
• 😀 The less capital you have, the fewer stocks you need in your portfolio. If you're starting out with small sums, you can afford to take on more risk and focus on fewer investments.
• 😀 The process of determining the right number of stocks for your portfolio depends on factors such as your knowledge of the market, the riskiness of the assets, and your ability to earn back any losses quickly.
• 😀 For investors who have smaller amounts of capital or are just starting out, focusing on 6-8 investments can be more beneficial than spreading investments too thinly across a larger number of stocks.

Q & A

Why is diversification important for stock market investors?

Diversification is crucial for reducing risk by spreading investments across different stocks. It helps minimize the potential downside while optimizing the potential upside, ensuring that a poor-performing stock doesn't significantly impact the entire portfolio.

What does Warren Buffett think about diversification?

Warren Buffett believes that most investors get diversification wrong. While it can reduce risk, excessive diversification can lead to ‘diworsification’, which is when the performance of a portfolio is weakened by too many mediocre stocks, preventing maximum returns.

How did Warren Buffett's early investing career shape his views on diversification?

In the early stages of his career, Buffett started with very little diversification, investing all of his net worth in just a few stocks. However, as he learned more about investing, he increased his holdings, but he still preferred concentrated positions in a few strong companies rather than spreading his investments too thin.

How many stocks did Buffett hold in his portfolio at the beginning of his investing career?

In the beginning of his career, Warren Buffett held just one stock: three preferred shares of Cities Service, which was a very small and concentrated position.

What was the impact of reading 'The Intelligent Investor' on Warren Buffett's investing strategy?

Reading 'The Intelligent Investor' and studying value investing under Benjamin Graham led Buffett to diversify his portfolio slightly, initially holding seven stocks. However, he remained focused on large, promising positions and didn't over-diversify.

How many companies does Warren Buffett's portfolio consist of today?

Today, Warren Buffett owns more than 40 listed companies and more than 50 wholly-owned subsidiaries. While his portfolio is still top-heavy, it is more diversified compared to his earlier, concentrated investments.

Does Warren Buffett prefer a concentrated or diversified portfolio in his later years?

Although Buffett's portfolio today consists of more companies, he still prefers concentrated investments in a few high-quality companies. He has limited opportunities to invest heavily in a single company due to the size of his capital, but he would still favor a concentrated portfolio if possible.

What are the four rules of thumb Buffett uses to determine how many stocks to have in a portfolio?

1) Are you a 'know-something' investor? 2) Are you investing in risky assets? 3) Are some opportunities much better than others? 4) Can you earn it back? These rules help determine whether to concentrate your portfolio or diversify based on your knowledge, the risk of assets, and the quality of opportunities.

What advice does Buffett give to 'know-nothing' investors?

Buffett advises 'know-nothing' investors to invest in a broad, diversified portfolio, such as an index fund, since they lack the expertise to analyze individual stocks. By acknowledging their limitations, these investors can still outperform many professionals.

How does Buffett define 'diworsification'?

Buffett defines 'diworsification' as over-diversifying a portfolio with too many mediocre stocks, which reduces the overall potential for returns. Instead of spreading risk too thin, investors should focus on a smaller number of high-quality investments.