Why Retail Investors Should NOT Follow Warren Buffett for Managing Risk

Billionaire Warren Buffett is one of the most celebrated investors of all time. He is often hyped by the media for his greatness and some loyal followers almost worship him as if he is the god. However he is not all that hyped up to be. It can be argued that he is riding on his old glory and ordinary investors do not have to follow his every move. One does not need to be rocket scientist to understand that much of his Berkshire Hathway’s revenue comes from insurance. In the insurance business, billions of dollars flow in on a regular basis and the company gets to invest the funds as it wishes. A recent report noted that the company has accumulated a cash pile of over $157.0 billion.

With that said, retail investors absolutely should not follow Mr.Buffett in managing risk. This is because he does not believe in diversification in the true sense of thee word. He makes concentrated bets and hopes to win huge. If he wins even with one or two such bets the outsize returns would erase the losses from other fails and he can claim he is a true genius. Unlike him, retail investors do not have luxury of making concentrated bets on a few stocks for the simple fact that they cannot afford their investment.

A recent article by Charles-Henry Mochau at syz Group discussed how diversification is not one of Mr.Buffett’s principles. From the piece:

This is how the Oracle of Omaha manages risk. Instead of diversifying portfolios excessively, he takes highly concentrated bets on companies for which his level of conviction and knowledge is very high. 

Almost half of Warren Buffett’s portfolio consists of Apple (48%), worth $163 billion. The top 5 stocks account for over 75% of the total portfolio.

Source: The week in seven charts, syz Group

Leave a Reply

Your email address will not be published. Required fields are marked *