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On Warren Buffett's Stock "Allowance"

Warren Buffett once proposed that new investors, graduating from business school, should have a limit, or what I call an "allowance," of the number of stocks they are allowed to invest in. This limit could be raised every few years. If a company was taken over or went bankrupt, the student could replace that stock with another. But the whole purpose was to force the student to focus the mind on a handful of stocks, thereby avoiding the bankruptcy candidates (and hopefully finding the takeover candidates).

My version of this allowance system would be very simple: one allowed stock for each year of a person's age. An "allowance" of twenty-five stocks for a 25 year old MBA graduate, and one additional one for each passing year.

Mr. Buffett pretty much practices this in his company's stock portfolio; no more than 20 or so main positions (those selected by himself), plus some arbitrage positions (not counted). In any event, at age 80, he would have an "allowance" of 80 stocks, reflecting his mature years.

Yours truly, who usually follows a Graham style of wide diversification, does't do this either as a stock picker. But he has been known to follow a similar system in certain other areas of life. When one is conscious of the fact that the next installment of the "allowance" is years away, it really focuses the mind on what you are doing.