Warren Buffett is almost as well-known for his insightful investing tips as he is for his phenomenal success in the stock markets.
That success has seen the 92-year-old CEO of the US$729 billion Berkshire Hathaway amass a personal fortune of more than US$100 billion.
As Warren Buffett started out on his journey with almost nothing, that stellar success makes investors the world over lean in to listen when he speaks.
"Be greedy when others are fearful," is one of my favourites and one of the Oracle of Omaha's best known quotes.
And it leads directly to another one of his better-known tips for buying outperforming companies. Namely, "Buying stocks for less than what they are worth."
While those are solid investing nuggets, we should all bear in mind, most of us aren't in a position to emulate all of the strategies employed by Warren Buffett.
Which brings us to Berkshire Hathaway's concentrated portfolio.
Should we copy Warren Buffett here?
You may be surprised to learn that more than 75% of Berkshire Hathaway's portfolio is invested in just five companies.
According to company's report as of 31 March, here's the percentage breakdown of Berkshire's top five holdings:
- Apple Inc (NASDAQ: AAPL) – 47.1%
- Bank of America Corp (NYSE: BAC) – 8.7%
- Coca-Cola Co (NYSE: KO) – 7.3%
- American Express Company (NYSE: AXP) – 6.8%
- Chevron Corporation (NYSE: CVX) – 6.2%
Which brings another Warren Buffett saying to mind, "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."
Clearly Berkshire is holding on to a large portion of those few winners. Indeed, Apple stock is up more than 550% since Berkshire bought its first tranche of shares in early 2016.
But that same investment strategy can be very risky for retail investors like you and me.
Lacking a crystal ball, investing most of your funds into a handful of stocks like Warren Buffett has done could see your portfolio crumble if things take a downturn for just a few of them.
That's why the Motley Fool stresses the importance of diversification.
Ideally, investors should look to diversify their portfolios across a range of companies operating in different sectors and across different parts of the world. That way if a specific sector or company takes a hit, your entire portfolio won't go down the tubes.
How to diversify on the ASX
There's no magic figure as to the number of stocks required for a diversified portfolio.
But 20 to 25 is a good target and certainly, it should be more than the five companies which Warren Buffett has picked to make up the bulk of Berkshire's portfolio.
Now researching through heaps of company reports to find 25 likely winners can take a lot of time. Which is where good investment advice can come in very handy.
Alternatively, investors can look to exchange-traded funds (ETFs) to gain that diversification with just a few investments.
There are lots of ETFs trading on the ASX. Some track specific commodities, assets, or sectors. Others offer inverse returns, which (similar to shorting) will see your investment gain if the underlying asset loses value.
With longer-term gains in mind, one ETF to consider for instant diversification is the BetaShares Australia 200 ETF (ASX: A200).
A200 is intended to track the performance of 200 of the largest companies by market capitalisation listed on the ASX.
So, what does Warren Buffett think of ETFs?
He's a big fan, actually.
According to Warren Buffett (courtesy of Forbes):
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.
The A200 charges a rock-bottom management fee of 0.04% per year.
