Learn to invest with Buffett

Chapter 18

Chapter 3 Section 2 Put all your eggs in one basket
Concentrating investment is a good way to obtain excess returns, and diversifying investments will also disperse returns while diversifying risks.Anyone who is afraid to hold a heavy position in a stock is nothing more than not sure of the chance of winning the target to be purchased, but this cannot be used as a reason for us to buy stocks.Because, if we are not sure about the company we want to buy, even if it is a share, we can’t buy it. As the saying goes, we only do the most certain market and only buy the most certain stocks.

--Warren Buffett
In 1984, Buffett said in a letter to shareholders: "With our financial strength, we can buy a small number of stocks that we want to sell at a reasonable price. Bill Rose described the trouble of excessive diversification; if you With 40 wives and concubines, you must not know every woman thoroughly. In the long run, the strategy of concentrated holdings will eventually show its advantages. Had a particularly bad year, and at least we can be thankful that we invested more money than everyone else."

Buffett believes that since concentrated investment is an advantage given to individual investors by the market, individual investors should take advantage of this advantage.In fact, although the method of concentrated investment is a fast and accurate investment method, it has been ignored by market investors for a long time.For many individual investors around us, there are not a few people who own more than 10 stocks with 5 yuan of capital, and most of these people lose money.In fact, in the current market size and liquidity, even 1000 million funds to own a stock is not bad. As an individual investor, what you need to do more is the work behind the investment.

He sees diversity as a protection against ignorance.Not only will it not reduce your investment risk, but it will share your investment profits. On the contrary, concentrated investment can help us concentrate our profits.

Of course, the premise of concentrated investment is careful stock selection. Generally speaking, you should concentrate your investment in the following three stocks:

1. Concentrate on the best companies

Buffett said: "As investors, we all want to invest in excellent companies with clear and understandable businesses, consistent high performance, and run by competent and shareholder-oriented management. This goal does not fully guarantee our investment profitability: Not only do we want to buy at a reasonable price, but the future performance of the companies we buy must match our estimates. However, this investment method-finding superstars-provides us with the only path to true success. Chance.

"If you are a learned investor who can understand the economics of a business and can spot 5-10 reasonably priced companies with long-term competitive advantages, then traditional diversification means nothing to you. , doing so will actually hurt your investment results and increase investment risk. What we don't understand is why a believer in diversification would choose some companies that are in the top 20 of his favorite companies to invest in instead of Simply invest only in the companies he likes best -- the ones he knows best, have the least risk, and have the greatest profit potential.

"Actually, as an investor, our income comes from the efforts of a super team of corporate managers. Although the companies they manage are running very ordinary businesses, they have achieved extraordinary performance. What we want to focus on investing in It’s such a great company.”

2. Concentrate on companies you know well

As an investor, the goal should simply be to buy at a reasonable price a fraction of a company whose business you can easily understand and which you can be sure will be worth five, ten, twenty years from now. The company's earnings are virtually certain to grow substantially.Over a long period of time, you'll find only a few companies that meet these criteria, so as soon as you see one that does, you should buy a substantial amount of the stock.

The strategy is to concentrate investment and try to avoid the diversification practice of buying a little of this stock and buying a little of that stock when we are only slightly interested in a company or its stock price.When I am convinced that the company's stock is attractive for investment, I also believe that this stock is worthy of large-scale investment.

In Buffett's view, there are very few companies that we are very sure are worthy of long-term investment.Therefore, when we find such a company, we should hold a considerable share and concentrate our investment.He said: "When we think we have done serious research and can buy at an attractive price, with our financial strength, we can invest heavily in these few stocks." (Rael Ross once described The problem with over-diversification: If you have 40 wives, you don't know all of them thoroughly.) In the long run, our policy of concentrated holdings is sure to produce superior investment returns, although somewhat influenced by Burke. Hill's too large a drag."

3. Concentrate on companies with the least risk
The reason why Buffett adopts a concentrated investment strategy is because concentrated investment in excellent corporate stocks that investors know very well has far less investment risk than diversification in corporate stocks that many investors do not know much about.

Buffett believes that in stock investment, we expect every investment to have an ideal return, because we concentrate our funds on a small number of financially stable, strong competitive advantages, and are managed by extraordinary capable, honest and trustworthy managers. on the stocks of the companies under management.If we buy such companies at a reasonable price, the probability of investment loss is usually very small, and indeed in the 38 years we have managed Berkshire stock investments (net of General Re and GEICO investments), The ratio of stock investment profit to investment loss is about 100:1.

There are many types of stocks held by many investors.

Why do these investors run counter to Buffett's idea of ​​focusing on investment?This is actually their psychology of wanting to use a variety of stocks to diversify their risks.But the opportunity to get rich by buying the right company has been "scattered" by them and turned into nothing.

In fact, the more diversified the portfolio, the less pronounced the sharpness of stock price movements will be on the statements.For most investors, the method of diversification is indeed safe, because all fluctuations are offset by diversification.But the other side of the coin is that the profitability curve is relatively flat and lackluster.Therefore, although the method of diversification of investment will not cause too much emotional reaction from customers, it will always only obtain relatively ordinary profits.

Investment motto:

For small and medium shareholders, concentrated investment is a fast and accurate investment method.Because individual investment always has an advantage over institutional investors in concentrated investment.Even if institutional investors concentrate again, it is impossible for institutional investors to concentrate their funds excessively on a few stocks because of policy determination, risk avoidance and competition from other funds. Personal characteristics also determine that concentrated investment is fast and accurate.

(End of this chapter)