Warren Buffett: How Many Stocks Should You Own?
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Published 2021-11-08
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If you are an investor and you want to optimize your stock market returns, it isn’t enough just to pick the right stocks - you must also know how to combine different stocks into a portfolio to maximize potential upside and minimize potential downside. You want to diversify – meaning reducing your risk, but you don’t want to diworsify – meaning reducing your investment returns. Luckily, Warren Buffett has got us covered on this topic, but he thinks that most investors tend to get this one wrong, so listen up.
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Timestamps of Warren Buffett’s advice on diversification:
00:00 Intro
00:54 Warren Buffett’s Portfolio – Then and Now
04:47 Are You a Know-Something Investor?
06:57 Are You Investing in Risky Assets?
08:23 Are Some Opportunities Much Better Than Others?
09:24 Can You Earn It Back?
10:53 Applying This to My Own Portfolio
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Here follows a few of the assumptions I used to compute Buffett’s current portfolio. Please note that these are simplified assumptions, appropriate for creating a pie chart in a video discussing diversification (I think), but I wouldn’t base any investment decisions on this. With that said:
1. Apple – Value: $135.2b (market value according to CNBC)
2. BNSF – Value: $128.8b (assuming same P/E as competitor Union Pacific)
3. BH Reinsurance – Value: $85b ((3y average earnings + 7% returns on float) x P/E 17*)
4. BH Energy – Value: $71.3b (assuming same P/E as Consolidated Edison)
5. GEICO – Value: $69.7b ((3y average earnings + 7% returns on float) x P/E 17*)
6. Bank of America – Value: $49.4b (market value according to CNBC)
7. BH Primary Insurance – Value: $28.9b ((3y average earnings + 7% returns on float) x P/E 17*)
8. American Express – Value: $26.4b (market value according to CNBC)
9. Coca-Cola – Value: $22.5b (market value according to CNBC)
10. PCC – Value: $20b (purchased in 2016 for $32b and Buffett recently made a write-down on that purchase of $11b, so I think $20b is close to a fair value)
11. Cash & Equivalents (Parent Company Level) – Value: $12.3b
12. US T-Bills (Parent Company Level) – Value: $29.8b
13. Other Listed Securities (40+) – Value: $94.8b (market value according to CNBC)
14. Other Operating Companies (40+) – Value: $133.3b (the rest have combined pre-tax earnings of something like $10b, and I put a P/E 13 on that)
*I looked at a bunch of insurance companies, like Progressive, Allstate, Hannover, Swiss Re etc, and although earnings can vary a ton from year to year for these companies, P/E 17 seemed to be the current market valuation for averaged yearly earnings. I notice no obvious difference in valuations between reinsurance and casualty insurance.
Also note that this will not add up to Berkshire’s current market cap of $650b, and that’s partly because Berkshire is leveraged, partly because the market may not agree with me on these assumptions.
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My goal with this channel is to help you make more money and improve your personal finances. How to become a millionaire? There are many ways to get there – investing in the stock market, becoming a stock trader, doing real estate investing, or why not becoming an entrepreneur? But whether you are interested in how to invest in stocks or investing strategies for creating passive income with rental properties – I hope to be able to provide you with a solution (or at least an idea) here. Warren Buffett - the greatest investor of our time - says that you should fill your mind with competing ideas and then see what makes sense to you. This channel is about filling your mind with those ideas. And in the process – upgrading your money-making toolbox.
All Comments (21)
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Great quote. "Diversification makes very little sense for anyone who knows what they're doing." - Warren Buffett
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For people looking into index fund, you can go further and go with ETF which are basically funds of funds allowing you to diversify into many market at once including international / emerging markets. They have the bonus of being self rebalancing and usually deal with currency exchange rate themselves when they include foreign assets.
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The most important part of Buffett's sentence at 0:40 "..for anyone who knows what they're doing." If you're watching this, there is a 99.9% chance you DO NOT KNOW WHAT YOU ARE DOING. Therefore if you believe you can pick stocks, you are almost certainly shooting yourself in the foot in the long run, the extent of the damage you do to yourself could be anything from just not making as much as if you'd bought the whole haystack, to literally losing every penny you speculate with (yes you aren't an investor, you're a speculator), to even worse with leverage. The sooner you stop lying to yourself about how much you actually the know, the quicker you will get rich or save yourself from ruin.
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I've been through the 4 disiplines you suggest, and despite it backing my investment philosophy I will be thinking about paring down the number of funds I have. Appear to be a number which are basically duplicates. So a worthwhile exercise, thank you.
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Great video and exceptional advice, of course it is coming right from the Oracle himself!! I certainly agree about diversify and "diworsify." It is easy to get carried away when it comes to investing and invest into whatever you think looks good or can explode to get you to overnight millionaire if you will, but the reality is rarely does that happen and you lessen the chances of wealth... Sure, diversify your portfolio, but aim to have only the highest conviction stocks of yours within your portfolio and really double down on building momentous positions ... I altered my portfolio mid-2020 taking more of a Bill Ackman approach to investing and the game has changed .... BIG time.
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I think sometimes if a good deal comes along and you pour most of your money into it thats fine. But then good deals dont last long and before you know it you have to start looking for another great deal. I think it can make sense to start off only owning a few stocks but over the years scale up the number of stocks you own as more deals come along.
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It is about how much money you have to invest that really counts. As time went by Warren Buffet made more money so it made sense for him to buy more stocks and still able to invest a lot of money into each stock. If you have 1,000 dollars to invest it doesn't make sense to have 10 stocks.
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Great video! Very straightforward and simple.
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Your videos are great, thank you for educating us
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I have a small amount to invest and hold 10 positions, two of them are TIPS and Commodities, one of them is an index and 7 feels just right to keep an eye on ATM
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Thank you very much for all the educational videos you make.
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I don't put a limit. As long as I find good companies. If I have some (over years) that only go sideways, I may sell. But I only keep acquiring up to a price. I also keep putting more in my top four, and a little more in the others.
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Diversification principles for stocks and bonds are quite different. Also style of stock investing dictates how to diversify. Anyway, thanks for good video.
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Extremely informative video. Love the illustrations & Buffet quote. Thank you very much.
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Excellent stuff as usual, mate! Thx again for putting in the effort condensing these golden thoughts into 10 minutes chewable nuggets. Much appreciated!
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I just want to say thank you, I very much love your content! Learned so much from you
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super thank you for this video 🙏
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Wonderful breakdown and examples, thank you so much for your work on this.
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I learned about the Pareto Principle 3 years ago and realized that 20% of my stocks accounted for 80% of my gains. I have since consolidated my portfolio down to my top 40% performing stocks and my yearly rate of returns has significantly improved. If this continues for a few more years, I plan to consolidate further.
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hi, would you might to share me which software or application you are using for your video? thank you
