Why Buffett’s Strategy is Not for Everybody?

Mr. Warren Buffett has a unique and very successful style of investing. He analyzes businesses deeply and then invests in a few good businesses at a bargain. This goes against the principles of diversification. It works because he is so good at picking those few companies. Everybody is not good at stock picking. So, the next best thing one can do is diversify their portfolio rather than betting on a handful of stocks like Mr. Buffett. Remember that your portfolio is for retirement purpose with a rate of return in your mind to achieve that goal. Diversification can help reduce the risk while your return criteria are met. Mr. Buffett is now managing investments not for his retirement but with a purpose of generating higher than market returns and for him diversification can limit the upside. He has the capacity to take that extra risk for extra return, but you necessarily don’t have that privilege.

How much should we diversify?

I believe that if you are investing in individual stocks, you need to hold at least 25 stocks and from multiple sectors. Typically when investing in mutual funds, portfolios tend to become very financial sector heavy and you need to avoid that situation when investing in stocks. In fact, try to limit your single stock weightage to 4% and sector weightage to 16%. This means you should avoid holding both too little and too many stocks from the same sector. Now often a few of these stocks outperform and their weightage increases beyond 4% over time. Just keep actively monitoring at least once a month. I actually invest money into stocks every week. If stock weightage increases beyond 4%, that should eventually be taken into account when making new investments. I won’t sell those stocks though, as they are winners and we should let the winners run.

How to get super returns?

Having a diversified set of stocks that provide regular income and that grows over time is the basic goal that I have. Once, this core portfolio is set I will start thinking about satellite strategies to enhance returns and have some fun in the market. This would include taking positions in few stocks like Mr. Buffett or even pursuing growth strategies with a shorter time frame in mind. But this is all after I have my core positions set to help me retire. This will also help me become good at analyzing stocks over time and improve my chances.

Mr. Buffett is the greatest investor of the century and no doubt we should learn every bit from his investment style that we can. However, we need to manage our risk while we learn and sail to a safe place.