Collection: Warren Buffett - #16 | Should You All In Into Stocks?



[Transcript]

AUDIENCE MEMBER

Mr. Buffett, my name is Aaron Morris (PH). I’m from California. What I wanted to know was how you think about how large a position you’re willing to take in a given security, both in your case, where you have new cash coming in that you can invest, and in the case of an investor, where they have a fixed amount of capital, and they’re trying to decide what’s the most (inaudible) security that they really love? WARREN BUFFETT

Well, Charlie and I have — probably at our present size, we will never find anything that we get as much money into as we want. Don’t you think that’s probably true, Charlie? If we really like it? CHARLIE MUNGER

Yeah, I think that’s quite likely. WARREN BUFFETT

Yeah, so we will probably never hit the limit. We would love to. We’d love to find something we felt that strongly about, and occasionally we do. But we won’t get as much money into it as we would wish, or as if we were running a million dollars of our own money or some number like that, so — We are willing to put a lot of money into a single security. When I ran the partnership, the limit I got to was about 40 percent in a single stock. I think Charlie, when you ran your partnership, you had more than 40 percent in — CHARLIE MUNGER

Sure. (Laughter) WARREN BUFFETT

And we would do the same thing if we were running smaller partnerships, or our own capital were smaller and we were running that ourselves. Because, no, we’re not going to do that unless we think we understand the business very well, and we think the nature of the business, what we’re paying for it, the people running it, and all of that lead up to virtually no risk, and — But you find those things, occasionally. And we would put — assuming it were that much more attractive than the second, and third, and fourth choices — we would put a big percentage of our net worth in it. We only advise you to do that — well, we probably don’t advise you to do it all, maybe — but we would only advise you to do it, if you’re doing it based on your conclusions about — your own ideas of value, and something that you really feel you know enough to buy the whole business, if your funds were sufficient, and it was being offered to you. You ought to really understand the business. But people do that all the time, incidentally, in private businesses, which have got terrible prospects. I mean, they buy dry cleaning establishments, or filling stations, or whatever, and they put very high —franchises of some kind — they put a very high percentage of their net worth into something — a business that’s very risky, basically. I mean, it — People put all their money in a farm, you know. It’s a business. It’s subject to all kinds of business risk. So it’s not crazy, if you understand the business well, and if the price is sufficiently attractive, to put a very significant percentage of your net worth in. If you don’t understand businesses, then you’re better off diversifying and fairly widely diversifying. Zone — go ahead. Sorry CHARLIE MUNGER

Berkshire has a substantial shareholder whose father accumulated the original position, and when he died he left a very large estate, practically all of which was in two securities, Berkshire and one other outstanding company. A bank was co-trustee. And the bank trust officer said you’ve got to diversify this. And, you know, it was a very large estate. And the young man who was co-trustee with the bank said, “Well,” he says, “you know, if my father believed the way you do, he might have been a trust officer in a bank instead of — (laughter) — leaving this large estate.” (Applause) And that young man holds the Berkshire to this day. And I suppose the bank is still giving the same advice. (Laughter)

WARREN BUFFETT

Zone 2?

(Source: https://buffett.cnbc.com/1994-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

 

[YAPSS Takeaway]

If you understand the business well and the current price is much more attractive than other investment options you have, it is okay to put a significant amount into it. But, if you do not understand the business well, it is better to diversify.

"It’s not crazy, if you understand the business well, and if the price is sufficiently attractive, to put a very significant percentage of your net worth in. If you don’t understand businesses, then you’re better off diversifying and fairly widely diversifying." ~Warren Buffett