‘A protection against ignorance’: Warren Buffett once blasted diversification for professional investors, says it’s ‘crazy to own 50 stocks’ — here's why

Buffett’s concentrated bets

Buffett’s portfolio held in Berkshire Hathaway’s account is notoriously concentrated in only a handful of stocks. By the end of 2023, the multinational conglomerate holding company had 41 stocks altogether, but many of these were less than 1% of the portfolio.

A jaw-dropping 50.19% of the portfolio was dedicated to just one stock: Apple. The top three stocks — Apple, American Express and Bank of America — account for 68% of the total value of the portfolio.

In a meeting with his shareholders, Buffett said this approach was valid because he was acting on professional experience and a deep conviction. “If you know how to analyze [and] value businesses, it’s crazy to own 50 stocks,” he said. “Three wonderful businesses is more than you need in this life to do very well.”

In other words, the Oracle of Omaha is confident in his ability to pick the best eggs, put them all in one basket and watch that basket closely.

However, it should be noted that Buffett isn’t as concentrated as it appears on his annual filings. That’s because he owns a wide range of other businesses, privately, inside the Berkshire Hathaway corporation.

The portfolio of private companies in this umbrella range from energy giants and insurance providers to candy factories and furniture makers.

Altogether, Buffett is actually quite well-diversified, and he recommends diversification for the ordinary investor, too.

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The benefits of diversification

Professional investors like Buffett, Jim Simons, David Einhorn and Daniel Loeb, have dedicated their lives to the stock game. They also have immense resources in the form of multinational corporations and an army of young talented analysts working to assist them.

In this environment, it’s easier to move forward with conviction on a handful of stocks and closely monitor every single earnings report.

However, the average investor likely has other employment that leaves little time (or energy) for such in-depth stock analysis. A dentist, plumber or high-school teacher, for example, won’t necessarily have the capacity to attend shareholder meetings and analyze earnings reports every week.

For these individuals, Buffett believes the best approach is a well-diversified passive index fund. Vanguard S&P 500 ETFs, for instance, track the performance of the underlying index and has delivered an attractive 14% compounded annual growth rate since its inception in 2010. That’s a decent return with minimal effort.

“Diversification is a protection against ignorance,” Buffett said. “I mean, if you want to make sure that nothing bad happens to you relative to the market… There's nothing wrong with that. That’s a perfectly sound approach for somebody who does not feel they know how to analyze businesses.”