Warren Buffett, the only man to make more than $100 billion investing, and his multibillionaire partner, Charlie Munger, both believe that diversification isn’t protection against ignorance.
Buffett says that the real risk is buying a poor security at any price or even a good security at a poor price level.
For instance, Buffett's purchase of American Express (AXP) during the "salad oil" scandal of 1963 had him put 40 percent of the partnership's assets into one asset.
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Buffett, in his speeches to college students, is famous for describing his "investing card" as a card with space for just 20 punches for your entire investment career.
Given this mentality, he says an investor would be much more careful about what he or she is invested in.
Munger, in his speech at USC at 1994, said that you wait until you find a mispriced opportunity. The wise ones bet only when they get that great opportunity. But they bet big when they have that opportunity.
The rest of the time they don't. It’s that simple.
Later in the same speech, Munger said that “most of Berkshire Hathaway and all of its accumulated billions, the top 10 insights account for most of it. And that's with a very brilliant man — Warren's a lot more able than I am and very disciplined — devoting his lifetime to it. I don't mean to say that he's only had 10 insights. I'm just saying that most of the money came from 10 insights.”
I have been fortunate enough to make a living as a professional investor.
Thousands of worldwide subscribers of the Dividend Machine, have enjoyed our 31 percent annual compounded return since inception just about three years ago.
Investing is 50 percent art (instinct) and 50 percent science (numbers).
I know many mutual funds have been negative for their owners despite many owning 60 stocks or more.
Investing in 60 inferior stocks is much more risky, in my opinion, than investing in 10 great ones.
Buying stocks is like building your circle of friends: being able to associate with quality is much better than quantity.
About the Author: Bill Spetrino
Bill Spetrino is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the Dividend Machine. Discover more by Clicking Here Now.
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