Jon Dolloff

Warren Buffett on Diversification

This article contradicts Buffett's teachings. Have you ever read the transcripts of any of Warren Buffett's question and answer sessions??? I have posted a lengthy and detailed response to this article on my blog: jondolloff.wordpress.com/. This article is extremely misleading and could lead people to misconstrue your advice.Less diversification and more concentration isn't necessarily a bad thing but for the average investor, diversification should be an important element of one's porfolio. Also, a thirty-three stock portfolio isn't necessarily a "non-diversified" portfolio. Read "Modern Portfolio Theory and Investment Analysis", by Edwin J. Elton and Martin J. Gruber. They explain that the average standard deviation of a portfolio containg only 1 stock is 49.2%. They conclude that increasing the number of stocks in the average well-balanced portfolio could reduce the portfolio's standard deviation to a maximum of 19.2%. Although, adding more stocks to one's portfolio, beyond the 20 stock threshold, only reduced the portfolio's risk by about 0.8%, the Elton & Gruber also found that the first 20 stocks reduced the portfolio's risk by 29.2%. I'll stick with diversification. And Warren Buffett will tell you the same thing.