Berkshire Hathaway’s Vice Chairman Charlie Munger has already used several opportunities to make clear his opposition to the diversification strategy. For these reasons, the star investor prefers to take a concentrated approach.
• Munger thinks diversification is “torture”
• Improvement in the depot
• Conflict between security and risk
Charlie Munger is considered one of the brightest minds on the market. The investor, born on January 1, 1924, is not only known as Vice Chairman of Warren Buffett’s investment company Berkshire Hathaway and as a long-time confidant of the “Oracle of Omaha”, but also chaired the investment vehicle Daily Journal Corporation for years. The philanthropist has since given up his chairman status there, but remains on the company’s board of directors. Munger regularly speaks with Buffett at Berkshire Hathaway’s shareholder meetings and provides insights into his investment strategies. In the past, the businessman often referred to the importance of “mental models,” which are arranged into a latticework in the mind and put together to form a larger whole. This is the only way to make optimal use of the previously acquired specialist knowledge.
Munger is not at a loss for controversial assessments
However, in his decades-long career as an entrepreneur and investor, Munger also made some statements about market events that not everyone may like. For example, Buffett’s right-hand man described Bitcoin, the largest cryptocurrency in terms of market capitalization, as “rat poison”. However, Munger’s more controversial assessments certainly include his criticism of the diversification strategy. This includes dividing the portfolio across several asset classes such as stocks, bonds, ETFs, raw materials and possibly also cryptocurrencies. This ideally cushions the portfolio if an individual asset suffers a sharp decline in price.
Not a fan of diversification
In the past, however, Munger was not suspected of being a supporter of this strategy – on the contrary. At the Daily Journal Corporation’s 2019 annual general meeting, the entrepreneur admitted that diversification “makes sense to a certain extent,” for example “if you don’t know what you’re doing” and don’t want to achieve excessive returns achieve. “But investment professionals think they’re helping you by providing diversification,” Munger warned. “An idiot could diversify a portfolio! Or a computer, for that matter.” However, if investors strive for “top performance”, diversification is by no means suitable. “It’s setting yourself an impossible task. What fun is it to solve an impossible task over and over again? I find it torture. Who would want to do that?”
Broad distribution is a “crazy idea”
At Berkshire Hathaway’s annual meeting this year, Munger reiterated his position on diversification – and also took a shot at the teaching of financial literacy. “One of the nonsensical things taught in modern university education is that broad diversification is absolutely necessary when investing in common stocks… That’s a crazy idea,” the investor said, pushing back against the popular belief. It is not easy to find several strong investments that create a diversified portfolio. Instead, investors should focus on a few stocks that have been identified as “best ideas”. “If you know the limits of your abilities pretty well, you should ignore most of our experts’ ideas about what I call ‘deworsification’ of portfolios,” Munger explained, referring to the English word “worse” for “worse.” at. The stock market expert considers a broad diversification in the portfolio to be a worsening.
Balance between security and returns difficult to achieve
According to Munger, it is not possible to maintain a balance between safe investments and high returns when diversifying. Although the risk of loss can be reduced with a broad diversification, as the star investor himself admitted in 2019, investors should not expect strong performance. In addition, according to “Benzinga,” Munger is likely to be annoyed that diversification dilutes expertise about the positions held. If there are many different stocks in the portfolio, investors can easily lose track of news and developments in them. However, if the number of different companies is manageable, investors can delve deeper into them and make trading decisions more carefully.
Greater concentration in the depot
A look at the Daily Journal Corporation depot shows that Munger not only preaches this concentrated approach, but also practices it. The $163.556 million portfolio still contained stocks of just four companies, namely US Bancorp, Alibaba, Bank of America and Wells Fargo, as of the second quarter of 2023. The three US banks have owned the investment vehicle since the fourth quarter of 2013, and Amazon’s Chinese competitor Alibaba found its way into Munger’s depot at the beginning of 2021 and is therefore still comparatively new.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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