Warren Buffett, the only man to make over $100 billion investing, and his multibillionaire partner Charlie Munger both believe that diversification is no protection against ignorance.
Buffett says that the real risk is buying a poor security at any price or even a good security at a poor price level. For instance, Buffett's purchase of American Express (AXP) during the "salad oil" scandal of 1963 had him put 40 percent of the partnership's assets into one asset.
Buffett in his speeches to college students is famous for describing investing card as card with space for just 20 punches for your entire investment career. He says, given this mentality, an investor would be much more careful about what he or she is invested in.
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Munger, in his speech at USC at 1994 said that you wait until you find a mispriced opportunity. The wise ones bet only when they get that great opportunity. But they bet big when they have that opportunity.
The rest of the time they don't. It’s that simple. Later in the same speech, Munger said that “most of Berkshire Hathaway and all of its accumulated billions, the top 10 insights account for most of it. And that's with a very brilliant man — Warren's a lot more able than I am and very disciplined — devoting his lifetime to it. I don't mean to say that he's only had 10 insights. I'm just saying that most of the money came from 10 insights.”
I understand that many are impatient and want to own many stocks. Each person needs to do what suits his or her personality best. The stock you buy at 45 times earnings that doubles in six months might be profitable, but you are not practicing value investing. The true value investor bets infrequently and on stocks that are priced appropriately.
Buffett did not buy Wal-Mart, Johnson and Johnson and Coke when the PEs were 35 but when they were "teenagers" (P/E in the teens). Done right, financial independence will soon come your way. I know it’s possible because it happened to me.
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