Came across this video of Warren Buffet and Charlie Munger discussing diversification. In a nutshell,  “diversification, as practice, generally makes very little sense for anyone that knows what they’re doing”. This brought to mind our post titled, The 60/40 portfolio is dead, long live the 60/40 portfolio.

It’s a great reminder to:

  • Fundamentals matter — Own a concentrated portfolio of high quality companies selected through a deep understanding of their business fundamentals.
  • Risk is not volatility — Risk and volatility are often used interchangeably, but they are distinct concepts. Where, risk is the potential for an actual financial loss. Volatility, on the other hand, is a statistical measure of the dispersion of returns for a given security or market index over time.
  • One size does not fit all – different stages in life call for different strategy’s and an investment manager charged with delivering growth and income to a group of investors is different than a ultra-high-net-worth investor.

Not everyone is going to take the time to understand the fundamentals of a business and people have different needs at different stages in their life. In the video, Warren goes on to say, “a really wonderful business is very well protected against the vicissitudes of the economy over time and competition… we’re talking about businesses that are resistant to effective competition and three of those will be better than a hundred average businesses and they’ll be safer…”

Warren and Charlie’s thoughts about diversification are no secret–that is not to say there are no benefits to modern portfolio theory and the capital asset pricing model. At the end of the day, the best you can do is have a money manager that can help you benefit from both ideas when appropriate.

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