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Charlie Munger's View on Investing in Just Three Stocks | Collection: Charlie Munger - #262



[Transcript]

AUDIENCE MEMBER

If you had a foundation today with let’s say a billion dollars, would you be comfortable with it being invested in just three stocks?


CHARLIE MUNGER

Well, let’s take the foundation… I’ll change your question around in the way that I want to answer it. (Laughter)



Am I comfortable with a non-diversified portfolio? Of course I am.


If you take the Mungers, I care about the Mungers. The Mungers have three stocks. We have a block of Berkshire, we have a block of Costco, we have a block of Li Lu’s Fund, and the rest is dribs and drabs.


So am I comfortable? Am I securely rich? You’re damn right I am. (Laughter)


Could other people be just as comfortable as I who didn’t have a vast portfolio with a lot of names in it, many of whom neither they nor their advisors understand? Of course they’d be better off if they did what I did.


And is three stocks enough? What are the chances that Costco’s going to fail? What are the chances that Berkshire Hathaway’s going to fail? What are the chances that Li Lu’s portfolio in China is going to fail? The chances that any one of those things happening is almost zero, the chances that all three of them are going to fail.


That’s one of the good ideas I had when I was young. When I started investing my little piddly savings as a lawyer, I tried to figure out how much diversification I would need

if I had a 10 percentage advantage every year over stocks generally. I just worked it out. I didn’t have any formula. I just worked it out with my high school algebra, and I realized that if I was going to be there for 30 or 40 years, I’d be about 99 percent sure that it would be just fine if I never owned more than three stocks and my average holding period is three or four years.


Once I had done that with my little pencil, I just…I never for a moment believed this balderdash they teach about. Why diversification and...


Diversification is a rule for those who don’t know anything. Warren calls them “know-nothing investors”.

If you’re a know-nothing investor of course you’re going to own the average, but if you’re not a know-nothing investor, if you’re actually capable of figuring out something that will work better, you’re just hurting yourselves looking for 50 when three will suffice. Hell, one will suffice if you do it right. One. If you have one cinch, what else do you need in life. And so the whole idea that the ‘know-something’ investor needs a lot of diversification.



To think that we’re paying these investors to teach this crap to our young. (Laughter) And people think they should be paid for telling us to diversify. Where it’s right, it’s an idiot decision. And where it’s wrong, you shouldn’t be teaching what’s wrong. What’s gone on in corporate finance teaching is that people are getting paid for dispensing balderdash.


And since I never believed that it was a great help to me, it helps if you’re out in the market and the other people are believing balderdash and you know what the hell’s going on. It’s a big help.


So of course you don’t want a lot… If your Uncle Horace, who has no children, has an immense business which is immensely secure and powerful. And he’s going to leave it all to you, if you come to work in the business. You don’t need any diversification.

You don’t need any corporate finance professors, you should go to work for Uncle Horace. It’s a cinch. You only need one cinch!


And sometimes the market gives you the equivalent of an Uncle Horace. And when it does, step up to the pie-cart with a big pan. Pie carts like that don’t come very often. When they do you have to have the gumption and the determination to seize the opportunity shrewdly.


I was lucky. Imagine learning that from your dead great-grandfather, at a very young age. But you know I spent my whole life with dead people. They’re so much better than many of the people I’m with here on earth. (Laughter)


All the dead people in the world, you can learn a lot from them. And they’re very convenient to reach. (Laughter) You reach out and grab a book. None of those problems with transportation.


So I really recommend making friends among the immanent dead. Which of course I did very early. And it’s been enormously helpful. Some of you wouldn’t have helped me. But Adam Smith really did.


(Source: https://youtu.be/BLctqhNClqY)

 

[YAPSS Takeaway]

  1. Diversification is not always necessary for investors, and a non-diversified portfolio can be successful if the investor is knowledgeable and has a sound strategy.

  2. A successful investment strategy depends on selecting the right stocks, rather than just having a large portfolio with many names in it.

  3. Learning from the wisdom of past generations, including through reading books, can be very beneficial for developing one's investment strategy.



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