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Diversifying Your Portfolio Like Warren Buffet (But Without Wall Street)

The Wall Street mindset and traditional financial advisors all over the country teach us that diversity is key when investing. Have you sat back and thought why diversification is even necessary? Most would answer to avoid risk. They would likely use the ole “eggs in a basket” adage, too.  


Well, that goes against what, debatably the world’s best investor, says. Warren Buffet would describe diversification as diversifying your knowledge. If you don’t have a keen understanding of what you’re putting your money in, diversifying it even more is likely going to put you in an even worse position, not better. He also states that it would be impossible to be highly knowledgeable of more than 6 businesses or opportunities.  


That must explain why only 6 stocks make up more than 70% of his portfolio. Those stocks are as follows: 

  1. Wells Fargo (WFC) 
  1. Kraft Heinz (KHC) 
  1. Coca Cola (KO) 
  1. International Business Machines (IBM) 
  1. American Express (AXP) 
  1. Phillips 66 (PSX) 


Despite a good chunk of Buffet’s change being placed with Wall Street, Buffet’s challenges the Wall Street mentality with an extremely concentrated long stock portfolio (the 6 above). In fact, the traditional financial advisor would not call that portfolio diverse at all. He or she would likely describe it as too intensely focused. 


Buffet, however, describes it as diversification. He would also tell your traditional financial advisor or fund manager that buying 100 or so stocks are a vast over-diversification that will absolutely result in mediocre returns that quite possibly could be less than the market itself due to your traditional financial advisor’s ludicrous management fees.  


Buffet Video  


In the video above Buffet describes what your wealth would be like if you had a punch card with 20 punches and had to use a punch for each financial decision you made. He states, “you’d get very rich, because you would think through each one very hard.” Buffet also agrees with us in the emotional enticement of Wall Street. He adds, “There’s a temptation to dabble, particularly during bull markets, in stocks. It’s so easy! It’s easier now than ever because you can do it online! You click it in and maybe it goes up a point, you get excited about that and buy another one the next and so on…you can’t make any money over time doing that.” 


We have to think differently, and not get caught up in the emotional aspects of the diversification sermon that the vast majority of traditional financial planners are preaching today. What we believe is that you need to understand everything that you are doing by increasing knowledge on that topic or industry and thus reducing risk in the investment. How could you possibly have a deep understanding of every stock within the funds of your 401k or mutual fund? We refer to this concept as ROI (return on information).


Remember, Warren Buffet started his wealth accumulation plan with only $100. It is not about the money you have, but instead the knowledge you keep.

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