Diversification: Old School Buffett Style

By Jae Jun

www.oldschoolvalue.com

What You Will Learn

● Two different applications according to Buffett

● What a conservative/lazy investor is like● What an enterprising investor is like● We go back to baseball and investing● The key to diversifying● Buffett on ignorance and diversification

Foreword

Do you diversify?

Diversification must be one of money management’s most important concept.

When you speak to just a regular financial advisor they will probably mention that you haven’t diversified enough.

Have you diversified lately?

Two Different Applications

The way Buffett sees it, diversification falls into two categories.

Diversification for the conservative, lazy investor

1.

Diversification for the intelligent or enterprising investor

2.

The Conservative/Lazy Investor

● A person who does not spend too much time studying or being involved with their investments.

● These people are happy to buy a fund or a stock and check up on it once or twice a year.

For this group, Buffett informs us that conservative investors should diversify extensively and keep trading to a minimum.

Diversifying extensively

Means buying more stocks or mutual funds.

This is a way of owning a tiny piece of America.

The Enterprising Investor

This term was invented by Benjamin Graham in The Intelligent Investor and refers to people that are keen, eager and willing to devote time in finding investment opportunities and analysing those opportunities.

Enterprising investors are confident in their research, analytical abilities and decision.

For enterprisers, Buffett tells us that you should not diversify.

Owning around 6 companies is all you need.

“Wide diversification is only required when investors do not understand what they are doing.”

Warren Buffett

Back to Sprint Training

In baseball, You step to the plate and the pitcher throws a straight, fat, yet slow fastball right through the middle.

Do you:

a. Let it gob. Bunt it and try to get to first basec. Flex your muscles, lick you lips,

swing hard and try to hit it to the sun

● People who chose a and b, don’t hesitate and just buy index funds.

● C choosers, you know pitches like this don’t come very often.

If pitches like this come, are you going to diversify by putting a small portion of the your capital into it and then go searching for 30 identical pitches just to reduce the chance of getting out?

The Key to Diversifying

The KEY to diversifying is -

is to NOT diversify.

If you are confident in your analysis, you tend not worry about price fluctuations.

● Diversifying is for the conventional safety seekers and followers of Wall Street.

● Wall Street claims holding less stocks is risky, but the results of Buffett and the Super-Investors prove otherwise.

At most times, more than 70% of Buffett’s capital was invested into 4-5 companies. He knew he could hit that fastball and did it.

Are you scared to swing at your fastball?

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

Warren Buffett

Jae Jun (jae.jun@oldschoolvalue.com)http://www.oldschoolvalue.com

Old School Value improves your investment decisions and performs deep fundamental analysis and valuation for you. Just like a

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