How Warren Buffett Makes Big Bets and Why | Exploring Markets

How Warren Buffett Makes Big Bets and Why

Not enough people talk about Warren Buffett's views on diversification. In modern investing courses, and in textbooks everywhere, you will most likely be taught to diversify. Do not put all your eggs in one basket, they might say. Focus on spreading out your risk so that you can benefit in down and up markets. You don't want to lose it all. But most people don't know Buffett could care less about that theory. Why? Because he does his research and bets big on the stocks he thinks will win.

That's how he makes so much money.

If you read and study this one quote from Buffett, you will quickly understand what he thinks about betting big and why he does it. This might change your investment strategy forever. You can thank us later:

“I have two views on diversification: 
1. If you are a professional and have confidence, then I would advocate lots of concentration.
2. For everyone else, if it’s not your game, participate in total diversification.
But if it’s your game, diversification doesn’t make sense.  
It’s crazy to put money in your 20th choice rather than your 1st choice. 'LeBron James' analogy. If you have LeBron James on your team, don’t take him out of the game just to make room for some else.  
Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up.”