During the recent Berkshire Hathaway Annual Meeting, Charles Munger explained why some investors can’t tell their best ideas from their worst. Here’s an excerpt from the meeting:
Munger: I think one of the inane things that’s taught in modern University education is it a vast diversification is absolutely mandatory investing in common stocks.
That is an insane idea. It’s not that easy to have a vast plethora of good opportunities that are easily identified, and if you’ve only got three I’d rather be in my best ideas instead of my worst.
And now some people can’t tell their best ideas from their worst. In the act of deciding that an investment already is good they get to thinking it’s better than it is.
I think we make fewer mistakes like that than other people. And that is a blessing to us.
We’re not so smart but we kind of know where the edge of our smartness is. That is a very important part of practical intelligence.
And a lot of people who are geniuses on IQ tests think they’re a lot smarter than they are and what they are is dangerous.
But if you know the edge of your own ability pretty well you should ignore most of the notions of our experts about what I call deworsification of portfolios.
You can watch the entire discussion here:
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