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Charlie Munger’s comments on stock portfolio diversification have made waves within the investing world for many years. The late legendary investor repeatedly said that diversification is for “idiots” who do not know what they’re doing.
During a shareholder meeting in 2019, while answering a matter, Munger said:
“The thought of diversification is smart to a degree – for those who don’t know what you’re doing. In the event you want the usual result and don’t need to find yourself embarrassed, then after all, you must widely diversify. But no one is entitled to quite a lot of money for holding this view. It’s like knowing two plus two is 4. Any idiot can diversify a portfolio.”
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During a 2017 event, Munger said:
“Diversification is for individuals who do not know anything. Warren (Warren Buffett) calls them know-nothing investors. In the event you are able to determining something that may work higher, you are just hurting yourself searching for 50 (stocks) when three will suffice. Hell, one will suffice for those who do it right.”
Are Charlie Munger’s Thoughts on Diversification Relevant Today?
Charlie Munger died in November 2023 and on the time of his death, he was value about $2.6 billion. Munger was a genius and his stock-picking skills, wisdom and life will remain a subject of interest for generations to come back. Nonetheless, his blunt thoughts on diversification aren’t shared by many. Not everyone can bet their life savings on two or three stocks, especially beginners with a limited budget.
The “Dean of Valuation” and Finance Guru’s Counterargument
Aswath Damodaran, famously often called the “Dean of Valuation” on Wall Street, is a professor of finance on the Stern School of Business at Recent York University. The valuation guru is a nine-time “Professor of the Yr” winner at NYU and has written several notable books, including Investment Valuation, The Little Book of Valuation and The Corporate Lifecycle: Business, Investment and Management Implications, amongst many others.
Talking about Apple in a recent CNBC program, Damodaran was asked why Berkshire Hathaway is selling the iPhone maker’s shares. The professor said he believes it was a portfolio “concentration issue.”
“When you’ve a 3rd of your portfolio trapped in a single company, it’s a really dangerous place for anybody to be. So I feel the pruning reflected that overconcentration.”
This system host then reminded Damodaran about Charlie Munger’s thoughts on diversification and his advice to place all of your eggs in a single basket and watch it rigorously. She referred to the famous quote often attributed to Buffett and Munger, where they said you must keep all of your eggs in a single basket but watch that basket closely.
Damodaran responded by countering Munger’s idea, asking:
“Would you are taking 30% of your money now and buy anyone stock, regardless of how great it’s? And I’d wager he’d say no.”
Damodaran emphasized the necessity for consistency in investing approaches.
“It almost looks as if there are two sets of rules: One for investments we’re going to make and one for investments we have already made. I feel we should be consistent.”
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Charlie Munger’s Thoughts on Finance Professors and Portfolio Theory
If only Charlie Munger were here today to share his thoughts on the professor’s argument.
Nonetheless, Munger was all the time critical of contemporary portfolio theory at universities and was skeptical of finance professors. On the Wesco Annual Meeting in 2009, while discussing the problem of portfolio diversification, Munger said:
“By and huge, I do not think an excessive amount of of finance professors. It’s a field with witchcraft. I feel quite a lot of physics and engineering professors. They fight to show it like physics, nevertheless it doesn’t yield to that. I never went to school with finance professors. Finance professors all imagine in diversification, while we attempt to beat the common. In the event you buy a dob of every part, that’s different from buying something something about. That’s a special fountain than I need to drink in.”
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This text ‘Diversification For Idiots?’ – Valuation Guru Challenges Charlie Munger’s Thoughts on Putting All Your Eggs in One Basket on CNBC originally appeared on Benzinga.com