The diversification of the buffet changes the heart

The diversification of the buffet changes the heart

Warren Buffett, the man widely known as perhaps the greatest investor of all time, also has a remarkably interesting core story. The Oracle Omaha, as well-known value investor Warren Buffett, emerged from the dotcom bubble of the 1990s. He explained that he had not invested in companies he did not understand. His critics said he was out of date and that his value-investing approach was a relic of the past.

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When the market collapsed in the early 2000's, Buffet suddenly turned in his favor. However, after being famous for shunning tech stocks, even Oracle changed his ways. Today, Buffet's subsidiary Berkshire Hathaway owns $ 50 billion worth of shares in Apple, the largest of Berkshire. Diversification in technology pays off big for a buffet.

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Market conditions are "exceptional" this time

The current trend against diversification has many similarities in the history of investment. Almost any time the stock market is doing something out of the ordinary, you hear the slogan "Things are different this time". A record-breaking bull market reinforces the expectation that the good times will never end. Falling oil prices create the impression that prices will never rise again. The success of Amazon (AMZN) defined expectations that traditional retail is dead and that shopping malls cannot survive. A long period of outperformance by growth stocks indicates that valuable stocks will never lead the market again. However, history has shown us time and time again that market leadership changes over time, winners and losers come and go, trying to make the right buy and sell decisions at just the right time is a deceptive task... which brings us back to diversification.

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Benefits of diversification

In 1830, Massachusetts State Judge Samuel Putnam directed the investment trustees "to observe how the men of wisdom, prudence and intelligence manage their own affairs, not in relation to speculation, but in relation to the permanent disposition of their money, taking into account the potential income, as well as as the potential safety of the capital they Will be invested. " This mandate is widely recognized as one of the first guides to realizing that investors should consider risk as well as return when making investment decisions. The same logic applies to individuals.

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Consequently, it is unwise to assume unnecessary amounts of risk in pursuit of gains. To believe that "the situation is different this time" (despite decades of history suggesting the opposite) is unwise. Defensive investment is wise. Diversification is wise. It is a simple procedure that is to ensure that all of your eggs are not in one basket.

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In terms of investment, diversification means ensuring that not all of the risk in the portfolio is concentrated in one asset class (such as high-rise US stocks). This is why professional investment advisors recommend asset allocation across a variety of asset classes, often including domestic and foreign equities, large and small cap stocks, corporate and government bonds.

Yes, diversification means that investors will not enjoy the maximum gains that the best performing assets will provide. It also means that they will not incur the maximum loss that the worst performing assets will.

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