Kevin Godbold gives us his take on a Warren Buffett lecture to students.
I recently watched a fascinating video of a Warren Buffett lecture to students at The University of Florida.
Some of his utterances could become classics. Others are of interest because they reveal some of the investing practices that have made him rich, other than the well-known philosophy that has become the Buffett brand.
Buffett believes in 'extreme diversification' for 99% of the population, referring to index trackers. However, he says: 'for those willing to put in the required effort, intensity and time, diversification is a terrible mistake.' He reckons that 'six wonderful businesses' is all that most require.
Do as I do? You decide
'What we really want to do is buy businesses that we will be happy to own forever,' he asserts before admitting, 'we can't find a lot of them'.
In fact, Buffett's 'buy forever' approach, was only really developed under the influence of Charlie Munger, whom he met in 1959. It was put into practice with his purchase of See's Candies in 1972.
Coca Cola
(NYSE: KO)
, his preferred and largest holding, accounts for 19% of his current portfolio. The top six holdings make up 74% of it; so he is taking his own advice about portfolio diversification to some extent.
However, with 36 holdings altogether, there is surely more than just 'buy forever' to his investing style. He offers a little insight with this comment: 'I've done arbitrage for forty five years & it's a good business.'
You only have to get rich once
Buffett is referring to unnecessary risk with this quotation, adding, 'If you risk something that is important to you, for something that is unimportant to you, it just doesn't make any sense.'
However, he was already financially comfortable in 1956 with personal savings of $140,000, which equates to about £512,000 today. This was before he had even started the first of his investment partnerships.
Arguably, Buffett has never taken unnecessary risk.
Of his early investing, he says: 'the first way I went at stocks was to buy stocks selling way below working capital cheap quantitative stocks' -- classic Ben Graham 'cigar butt' investing in other words.
Now things are different, as he illustrates by saying: 'I don't want to buy into any business I'm not terribly sure of, so if I'm terribly sure of it, it probably isn't going to offer incredible returns &.. So we don't have huge returns in mind, but we do have in mind never losing anything.'
Investing or gambling?
'Investing is putting out money to be sure of getting more money back later ∧ to do that you have to understand what you are doing. You have to understand the business,' says Buffett.
If we remain in doubt, he has the last word by encouraging us to ask this: 'is the business going to keep producing more and more money all the time? If the answer to that question is yes, then you don't need to ask any more questions.'
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