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Charlie Munger’s comments about stock portfolio diversification have been making waves in the investment world for decades. The now legendary investor repeatedly said that diversification is for “idiots” who don’t know what they are doing.
At a 2019 shareholder meeting, Munger said, while answering a question:
“The idea of diversification makes sense to a certain extent – if you don’t know what you’re doing. If you want the standard result and don’t want to be embarrassed, then of course you should diversify widely. But no one is entitled to a lot of money because of this view. It’s like knowing that two plus two equals four.’
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At a 2017 event, Munger said:
“Diversification is for those who know nothing. Warren (Warren Buffett) calls them ‘know-nothing investors’. If you are able to come up with something that will work better, you are only hurting yourself if you look for 50 (shares) three will do. If you do it right, one is enough.’
Are Charlie Munger’s thoughts on diversification relevant today?
Charlie Munger died in November 2023 and at the time of his death he was worth approximately $2.6 billion. Munger was a genius and his stock picking skills, wisdom and life will remain a subject of interest for generations to come. However, his blunt thoughts on diversification are not shared by many. Not everyone can bet their savings on two or three stocks, especially beginners on a budget.
The counterargument from the ‘Dean of Valuation’ and the financial guru
Aswath Damodaran, known as the “Dean of Valuation” on Wall Street, is a professor of finance at New York University’s Stern School of Business. The valuation guru is a nine-time NYU Professor of the Year winner and has authored several notable books, including Investment Valuation, The Little Book of Valuation, and The Corporate Lifecycle: Business, Investment and Management Implications, among many others.
While talking about Apple on a recent CNBC program, Damodaran was asked why Berkshire Hathaway is selling the iPhone maker’s stock. The professor said he believes it was a portfolio “concentration problem.”
“If you keep a third of your portfolio in one company, that’s a very dangerous place for everyone. So I think the pruning reflected that over-concentration.”
The show host then reminded Damodaran of Charlie Munger’s thoughts on diversification and his advice to put all your eggs in one basket and pay close attention. She referenced the famous quote often attributed to Buffett and Munger where they said you should keep all your eggs in one basket, but keep a close eye on that basket.
Damodaran responded by contradicting Munger’s idea and asked:
‘Would you take 30% of your money right now and buy a stock, no matter how good it is? And I bet he would say no.”
Damodaran emphasized the need for consistency in the investment approach.
“It’s almost like there are two sets of rules: one for investments we’re going to make and one for investments we’ve already made. I think we have to be consistent.”
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Charlie Munger’s thoughts on finance professors and portfolio theory
If only Charlie Munger had been here today to share his thoughts on the professor’s argument.
However, Munger was always critical of modern portfolio theory at universities and skeptical of finance professors. At Wesco’s 2009 annual meeting, while discussing the issue of portfolio diversification, Munger said:
“I generally don’t think about finance professors that much. It’s a field with witchcraft. I think a lot about physics and engineering professors. They try to teach it like physics, but it doesn’t give in to that. I’ve never dealt with finance professors studied. Finance professors all believe in diversification, while we try to beat the average. If you buy a little bit of everything, that’s different from buying something you know something about.”
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This article ‘Diversification for idiots?’ – Appreciation Guru Challenges Charlie Munger’s Thoughts on Placing All Your Eggs in One Basket on CNBC originally appeared on Benzinga.com
