Author: Robert G. Hagstrom
Subtitled as “Mastering the Power of the Focus Investment Strategy”, Warren Buffett Portfolio written by Robert G Hagstrom, highlights the key investment philosophy of Warren Buffett and similar value investors like him. This book brings to our notice the key temperamental difference between superinvestors like Warren Buffett, Charlie Munger and a common money manager or any other investor.
This book summarizes several key concepts and mental models required for investing like the grand masters of investing and the key concept discussed in this blog is about diversification. Warren Buffett and Charlie Munger have often advocated against the conventional thinking of diversification for investors who are looking to maximize their returns. In 1996 Berkshire Hathaway annual meeting, Warren Buffett stated “Diversification serves as a protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There is nothing wrong with that. It’s a perfectly sound approach for somebody who doesn’t know how to analyze businesses.” This brings out a very interesting concept of who should diversify and who should not.
Historically, when Warren Buffett started his partnership in 1956, he started with Graham style quantitative investing wherein his bets were indirectly diversified. The partnership did exceptionally well however Warren Buffett stated very interestingly that he had owned about 500 or so stocks in total as long as the partnership was in operation however he made most of his money in about 10 or so stocks. This is about 2% of the portfolio! This explains a lot about quality and diversification. Similar was the case with Charlie Munger when he ran his partnership from 1962-1975. The returns of Buffett and Munger partnership are shown in tables below; their returns are compared with the Dow Jones Industrial Average as the benchmark.
Buffett Partnership Ltd.
| Year | Overall Partnership (%) | Dow Jones Industrial Average (%) |
| 1957 | 10.4 | -8.4 |
| 1958 | 40.9 | 38.5 |
| 1959 | 25.9 | 20.0 |
| 1960 | 22.8 | -6.2 |
| 1961 | 45.9 | 22.4 |
| 1962 | 13.9 | -7.6 |
| 1963 | 38.7 | 20.6 |
| 1964 | 27.8 | 18.7 |
| 1965 | 47.2 | 14.2 |
| 1966 | 20.4 | -15.6 |
| 1967 | 35.9 | 19.0 |
| 1968 | 58.8 | 7.7 |
| 1969 | 6.8 | -11.6 |
| Average Return | 30.4 | 8.6 |
Charles Munger Partnership
| Year | Overall Partnership (%) | Dow Jones Industrial Average (%) |
| 1962 | 30.1 | -7.6 |
| 1963 | 71.7 | 20.6 |
| 1964 | 49.7 | 18.7 |
| 1965 | 8.4 | 14.2 |
| 1966 | 12.4 | -15.8 |
| 1967 | 56.2 | 19.0 |
| 1968 | 40.4 | 7.7 |
| 1969 | 28.3 | -11.6 |
| 1970 | -0.1 | 8.7 |
| 1971 | 25.4 | 9.8 |
| 1972 | 8.3 | 18.2 |
| 1973 | -31.9 | -13.1 |
| 1974 | -31.5 | -23.1 |
| 1975 | 73.2 | 44.4 |
| Average Return | 24.3 | 6.4 |
This shows the excellence of Warren Buffett and Charlie Munger. This explains that their theory works in practice. However it is critical to differentiate between who should diversify and who should not. Below are some of the actionable steps based on the Diversification insight explained in Warren Buffett Portfolio.
Actionable Insights:
| Who Should Diversify? | Who Should Not Diversify? |
| 1. If you’re not a professional investor who cannot spend time analyzing businesses 2. If you have attempted understanding businesses and have discovered it is not your area of expertise 3. If you don’t have the temperament to ignore market volatility and a 40%-50% drop in your portfolio makes you restless. | 1. If you’re a professional investor or someone who can spend time understanding businesses. 2. If you understand intricacies of business economics, accounting, management and fundamental market behavior. 3. If a 40%-50% drop in your portfolio does not make you restless. 4. If you are willing to go that extra mile to understand business, its moat and have the will to keep an eye on competitive forces that challenge the moat. |
Disclaimer: The content in this blog is purely for educational purposes. We do not claim any copyright of the book Warren Buffett Portfolio, all rights reserved by the publisher and the author of the book
Value Investors Tribe 
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