Where I disagree with Buffett and Munger

(PS: this is not a click-bait, I do indeed disagree with Buffett and Munger 🙂 )

Dear Readers,

It has been very difficult to make time to blog in the recent few weeks. However, I am hopeful that things should improve on that front and should be able to make some time towards my passion for writing on my favorite subject i.e. dividend growth investing.

I was thinking of what would be a good topic to write about for my next post, and after a lot of thought, I decided to pick a rather controversial topic: the one about diversification vs concentration in a portfolio. Simply put, if you are investing your capital in a few businesses, should you focus your bets on a few stocks that you understand very well OR should you diversify your investments across a few sectors with the knowledge that you may not necessarily be an expert on each and every one of them.

This has been a long standing debate in the world of investing. And like with every debate on investing, it too evokes strong opinions. I happened to be discussing this subject with a friend of mine and while he and I agreed that diversification is the way to go for the average retail investor, he cited how two of the most famous and successful investors of our time, Warren Buffett and Charlie Munger, were against diversification.

So I decided to do some digging and found the following video from the 1996 Annual Berkshire Hathaway meeting, where one the shareholders puts this very question to Buffett and Munger. Check out the video below:

To quote Buffett on this (pay special attention to that statement in bold, we will revisit it soon):

But I can assure you that I would rather pick — if I had to bet the next 30 years on the fortunes of my family that would be dependent upon the income from a given group of businesses, I would rather pick three businesses from those we own than own a diversified group of 50.

So clearly Buffett does not believe in diversification and instead recommends a concentrated portfolio consisting of businesses that one understands very well.

I am going to take a contrarian stance and disagree with Buffett here from the perspective of the average investor. In my humble opinion, this is terrible advice for the average retail investor. Now I know what you might be thinking: what do I know in comparison to Buffett, one of the greatest investors of all time. Sure, I may not be as successful as Buffett, but what I do understand very well are my limitations as a regular Joe investor. Hear me out here for a second and then you can make up your mind.

I contend that how you and I understand and evaluate businesses is drastically different from how Buffett and Munger understand businesses. So when they claim that they understand a particular business well, it is NOT the same as my claim that I understand a business well. We both may understand a specific business in our own limited capacities. In fact, their knowledge base is so profound that their knowledge will vastly outweigh mine.

For these reasons, it makes very little sense for Buffett and Munger to diversify. Similarly, it makes very little sense for the average retail investor to NOT diversify.

To drive home this point further, fast forward to the 2021 Annual Berkshire Hathaway meeting. Here is a video for your reference ( between 13:34 and 16:54). In the meeting, Buffett shares a list of the top 20 companies (by market cap) in 2021 and asks his audience to guess how many of these companies figured on a similar list back in 1989. He then shares the second list with the audience from the year 1989. Here are the snapshots of the two lists for your reference:

Notice that none of the companies from the 1989 list are on the 2021 list. In fact, you may have not even heard of several of the companies in the 1989 list.

So, following Buffett’s advice, if I as a regular retail investor, were to simply invest in three businesses that I *thought* I knew well in 1989, imagine how that would have turned out for me? To make matters even worse, I looked at a similar list for 2000, nearly ten years after 1989. You can check out the list here. Once again, apart from General Electric and Exxon (prior to its merger with Mobil Corp.), the top 10 list looks drastically different.

Interestingly, in the 2021 Berkshire Hathaway meeting, Buffett goes on the advocate for low-cost index funds.

One thing it shows incidentally is that it’s a great argument for index funds is that the main thing to do is to be aboard the ship. A ship. They were all going to a better promised land, you just have to know which one was the one that necessarily get on. But you couldn’t help but do well. If you just had a diversified group of equities, US equities, that would be my preference, but to hold over a 30 year period.

I recommend the S&P 500 index fund, and have for a long, long time, to people. And I’ve never recommended Berkshire to anybody, because I don’t want people to buy it, because they think I’m tipping them into something I’d never. No matter what it was selling for. And I’ve made it public. On my death, there’s a fund for my then-widow, and 90% will go into an S&P 500 index fund, and 10% in treasury bills.I like Berkshire, but I think that a person who doesn’t know anything about stocks at all, and doesn’t have any special feelings about Berkshire, I think they ought to buy the S&P 500 index.

So did Buffett change his stance? Well, I am not sure. But I would agree with the Buffett of 2021, in that index funds are the perfect solution for someone who does not know what he/she does not know about stocks and businesses.

Let me know your thoughts below. Regardless of whether you agree or disagree with me, I would like to hear your opinions on the subject.

Monthly Income Update – May 2022

My dear readers,

The last few weeks have been really tough as far as finding any free time whatsoever towards blogging. As you might be aware, I switched jobs recently and a new job takes a lot of time especially during the initial stages where there is a steep ramp-up. Combine that with family health issues and then the end of the school year and other family activities, summer approaching etc., I have absolutely no free time for anything else. And that is how it should be. Family comes first after all.

That said, I am as strongly committed to my pursuit of financial independence through dividend growth investing as I am to this blog. This blog is very much a part of my investing journey. Which is why come what may, I will find some time to post my monthly income updates. This way, I can atleast make some time to look at my portfolio and see what is going on.

Lets get into the numbers then, shall we.

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1.Apple Inc. (AAPL)$2.31
2.AbbVie (ABBV)$20.61
3.Albertsons Inc. (ACI)$1.21
4.Caterpillar (CAT)$1.12
5.Clorox (CLX)$51.19
6.Costco (COST)$2.71
7.Procter & Gamble (PG)$10.15
8.AT&T (T)$1.16
9.Texas Instruments (TXN)$57.77
10.Verizon (VZ)$24.7
11. Realty Income Corp (O)$12.5
12.STAG Industrial (STAG)$3.5
13.JP Morgan Equity Income ETF (JEPI)$1.4
Total$189.88

So a total of 13 companies/ETFs rewarded me a monthly income of $189.88. Among these, TXN was highest dividend income payer, closely followed by CLX. I am very happy with my current percentage position in TXN. I have previously written about why this is one of my core holdings and why I am very bullish. I also made about $49.31 in option trading by writing covered calls. This brought my grand total for monthly income to about $239.19. At the same time last year, I had made about $35.96. So if you look at the YoY growth, this is about a 500%+ increase! Granted that a lot of this growth is due to the volume of my invested capital at this point in my journey. But still…500%+ is pretty staggering.

I added a new position in JEPI in one of my tax-advantaged accounts. JEPI is an actively managed fund that generates income by selling covered call options on large cap stocks. The trailing 12-month distribution yield is about 7.96%, at the time of writing this. I also looked at the top-holdings and the overall fund prospectus and their focus is mostly around the SP500 stocks tending towards low-volatility and that they believe are approaching over-valued territory. At the time of writing this, their top four holdings are Bristol Myers Squibb (BMY), Hershey (HSY), Progressive (PGR) and Coca-Cola (KO), all of which seemed overvalued per my analysis as well. Overall, I liked the exposure of relying on a covered call ETF in my tax-advantaged accounts. This is an interesting exercise, giving the benefits of covered call option trading without having to spend as much time. The high distribution yield is an interesting play in what is a very high inflationary environment. Anyway, we will see how this turns out.

Buys and Sells

There were no sells this month.

As far as buys, there was a lot more activity as my pending buy orders go triggered. Among the big buys, I added to my positions for MSFT, TROW, TXN and JPM. Some smaller “staying in the game” purchases included AFL, V, VZ and TGT. TGT and WMT got slaughtered this month as far as their stock prices after their earnings results. None of this was particularly surprising (to me atleast), because the effects of inflation, the situation in eastern Europe and the lockdowns in China were bound to have their impacts on companies in this sector. TGT, in particular, has been a big beneficiary of the lockdown paradigm for the best part of the last two years. So a reversion to the mean was certainly on the cards. Overall though, I think the business fundamentals are sound and I do not see this company going away soon atleast in my lifetime.

Summary

Yet another month is in the books. I am really hopeful of being more regular with my blog updates. We shall see. Let me know in the comments below as to how is your portfolio doing and how was your May.

See y’all in the next post…