As investors, we constantly grapple with the question of how much to allocate to each position in our portfolio. When students from Emory’s Goizueta Business School and the McCombs School of Business at UT Austin had the opportunity to visit Warren Buffett for a Q&A session, they gained valuable insights into his perspective on diversification and portfolio concentration.
While conventional financial advice preaches spreading investments across many stocks to reduce risk, Buffett argues that diversification isn’t always the best approach—especially for those who truly understand investing.
“I have two views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification,” Buffett told the students.
This distinction is critical. For the average investor, index funds and broad diversification provide safety. But for those who possess deep knowledge and conviction, Buffett believes concentration is a superior strategy.
“It’s crazy to put money into your 20th choice rather than your 1st choice,” he explained. To illustrate this, Buffett used an analogy: “If you have LeBron James on your team, don’t take him out of the game just to make room for someone else.”
Buffett and his longtime partner, Charlie Munger, have historically maintained a highly concentrated portfolio. “Charlie and I operated mostly with five positions. If I were running 50, 100, 200 million, I would have 80% in five positions, with 25% for the largest.”
Throughout his career, Buffett has made bold bets on businesses he believes in. In 1964, he made a major investment in American Express following the Salad Oil Scandal, allocating up to 40% of his portfolio to it. “I told investors they could pull their money out. None did.”
Similarly, in 1951, he invested nearly his entire net worth into GEICO, recognizing its long-term potential. Again in 1998, during the collapse of Long-Term Capital Management (LTCM), Buffett saw an opportunity in Treasury bonds and noted, “I would have been willing to put 75% of my portfolio into it.”
Despite taking large positions, Buffett and Munger have always been careful about one thing: avoiding permanent loss of capital. “Over the past 50-60 years, Charlie and I have never permanently lost more than 2% of our personal worth on a position. We’ve suffered quotational loss—50% movements. That’s why you should never borrow money. We don’t want to get into situations where anyone can pull the rug out from under our feet.”
Buffett also offered a perspective that defies common investor behavior: seeing stock price declines as opportunities instead of reasons to panic. “In stocks, it’s the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonald’s reduces the price of hamburgers, I think it’s great.”
Buffett’s quotes above were sourced from notes taken by a student during the meeting. You can find the full notes here:
Notes from Buffett Meeting – 02/15/2008
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