Warren Buffett: The Importance of Diversification in Investing

During the 2021 Berkshire Hathaway Annual Meeting, Warren Buffett cautions new stock market entrants against excessive trading, urging them to consider the unpredictability of long-term success for major companies.

He highlights a list of the 20 largest companies by market value as of March 31st, led by Apple. Buffett then compares this list with the top 20 companies from 1989, noting none remain on the current list, despite some still being prominent.

He emphasizes the uncertainty and rapid changes in the market over decades, advocating for diversified investments, such as index funds, to ensure steady growth rather than betting on specific companies.

Here’s an excerpt from the meeting:

WARREN BUFFETT: I would like to just go over two items that I would like — particularly new entrants to the stock market — to ponder just a bit before they try and do 30 or 40 trades a day in order to profit what — from what looks like a very easy game.

So, I would like to go to slide L-1. So, put that up. And these, on March 31st, I ran off a list of the 20 largest companies in the world, by stock market value. And those names — a good many of which will be familiar to you — but they were led by Apple at slightly over 2 trillion.

And it went down to the number 20th was worth 330-odd billion. But those are the 20 largest companies in the world, by market value, on March 31st.

Now if I had a little — I was hoping I could get a little quiz machine so I could have everybody weigh on this answer, and we could flash it up a little later, but that proved technically impossible for — but what I would like you to do is look at that list. It starts off with Apple, and Saudi Aramco is a pretty kind of a specialized country — company.

I don’t know whether it’s 95% owned by the government or what, but it’s essentially a country that’s for sale there (laughs), in terms of that business. But the top — of the top six companies, five of them are American.

So, when you hear people say that America hasn’t done — you know, it’s got all the — it’s not working very well or something of the sort — you know, in the whole world, of the six top companies in value, five of them are in the United States.

And if you think about it — you know, we talked a little about this last year — but in 1790, we had one-half of one percent of the world’s population — a little less — we had four million people, 3.9 million people. Six-hundred thousand of them were slaves.

Ireland had more people than the United States had. Russia had five times as many people as the U.S. did. Ukraine had twice as many people as the United States. So, here we were, well, what did we have?

We had a map for the future, an aspirational map, that somehow, now only 200 and — well, after the Constitution — 232 years later, leaves us with five of the top six companies in the world. You know, that’s not an accident.

And it’s not because we were way smarter, way stronger, you know, anything of the sort. We had good soil, decent climate. But so do some of those other countries I named. And the system has worked unbelievably well.

Just imagine thinking of five of the top six companies in the world ending up with a country that started with a half of one percent of the population just a few hundred years ago. But what I would like you to do is look at that list for a minute or two, if you want to.

And then make an estimate, make your own guess. How many of those companies are going to be on the list 30 years from now? Here they are. These powerhouses. How many would you guess are going to be on the list? Well, you know, it’s not going to be all 20. It may not even be all 20 today or tomorrow. (Laughs) This was March 31st.

But what would you guess? And think about that yourself. Would you put down five? Eight? Well, whatever it would be, I would now invite you to look at slide two — or L-2 — which goes back a little more than 30 years.

And look at the top 20 from 1989. And if you look at the top 20 from 1989, there’s two things that should grab your interest. At least two. None of the 20 from 30 years ago are on the present list. None. Zero.

There were then six U.S. companies on the list. And their names are familiar to you. They have General Electric. We have Exxon. We have IBM Corp. And these are — they’re still around.

Merck is down there at number — none made it to the list 30 years later. Zero. And I would guess that very few of you, when I asked you to play the quiz a little — a few minutes ago — would have put down zero. And I don’t think it will be zero.

But it is a reminder of what extraordinary things can happen. Things that seem obvious to you. Japan had this wonderful bull market for a very long time.

So, you had a number of Japanese companies on the list. Today there are none. And the United States had the six. Now we have 13. But they aren’t the same six. I would invite you to think about one other thing as you look at this list. 1989 was not the dark ages. And we weren’t just discovering capitalism or anything else. And people thought they knew a lot about the stock market. And the efficient market theory was in.

And they were — it was not a backward time. And if you look, the top company at that time had a market value of 100 billion, 104 billion. So, the largest company in the world, of title, in just a shade over 30 years, has gone from 100 billion to 2 trillion.

At the bottom, the number 20 has gone from 34 billion to something a little over ten times that. Well, that tells you something about what’s happened with equality, which is a hot subject in this country. It tells you a little bit about inflation. But this was not a highly inflationary period, as a whole.

But it tells you that capitalism has worked incredibly well, especially for the capitalists. And it’s a pretty astounding number.

Do you think it could be repeated now that — 30 years from now — that you could take 2 trillion for Apple, and multiply any company, and come up with 30 times that for the leader? You know, it seems impossible.

And maybe it is impossible. But that just — we were just as sure of ourselves as investors — and Wall Street was — in 1989 as we are today. But the world can change in very, very dramatic ways.

And I’ll just give you one other example you might ponder. This is — when you start feeling too sure of yourself — One thing it shows, incidentally, is that — it’s a great argument for index funds — is that, you know, the main thing to do was to be aboard the ship — you know, a ship.

You know, they were all going to a better promised land — you used to know which one was the one they’d necessarily get on — but you couldn’t help but do well if you just had a diversified group of equities — U.S. equities would be my preference — to hold over a 30-year period.

But if you thought you knew a lot about which ones to pick, or the person that you had hiring, you were paying a lot of money to, had all these ideas. And I could tell you their best ideas in 1989 did not necessarily do that well. Although, overall, equities were absolutely the place to be.

You can find the morning session here, which includes the excerpt above: