Stop praying at the altar of diversification.

Charlie Munger passed away last month, just 34 days shy of his 100th birthday.

Like many, I discovered Charlie through Warren Buffet - CEO of Berkshire Hathaway, and one of the greatest investors of all time.

In college I read a book called "Tap Dancing to Work" - it's a compilation of articles written about Warren, and in some instances by Warren, over a 60 year period.

By the time I finished that book, I had a new found admiration for Warren, and his Vice chairman, Charlie.

Over the coming years, I consumed as much content about these two as I could - even going as far as reading the Intelligent Investor, by Benjamin Graham - Warren's mentor.

But I hadn't really thought much about them until recently, when I got the news that Charlie had passed.

So I decided to go down a Warren and Charlie rabbit-hole...again. This time, watching countless interviews and Berkshire Hathaway shareholder meetings on YouTube.

And I'm glad I did, because I was reminded of something.

Something I had forgotten.

Something profound.

Something many call "conventional wisdom", two of the greatest investors ever call idiotic...

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I'm not entirely sure where this idea came from.

I can't pin-point who taught me it exactly. Or when.

Maybe it's such a common, and strongly held belief in the world that I simply took in through osmosis.

But for as long as I can remember, "diversification was the key to great investing".

A strong portfolio is a well balanced, diversified portfolio. It helps protect your downside, etc, etc.

And yet, Charlie and Warren spent the better part of their careers railing against the notion of diversification.

"As practiced, diversification makes very little sense for anyone that knows what they’re doing. Diversification is a protection against ignorance. If you want to make sure nothing bad happens to you relative to the market, sure you should diversify. There's nothing necessarily wrong with that...but in our view, true diversification is simply a confession that you do not truly understand the businesses that you own. If you find just 3 wonderful businesses in your lifetime, you'll get very rich." - Warren Buffet

"The idea of diversification makes sense to a point - if you don't know what you're doing. If you want the standard result and don't want to end up embarrassed - then of course, you should widely diversify. But nobody is entitled to a lot of money for holding this view. It's like knowing 2 plus 2 is 4. Any idiot can diversify a portfolio." - Charlie Munger

In my opinion, this is their most important message.

And yet, it gets talked about very little.

Both Warren and Charlie have pointed out on numerous occasions that the majority of the money in Berkshire Hathaway came from just 10 insights.

770 Billion dollars of value generated from just 10 key insights over the span of 60 years.

And on more than one occasion, Warren and Charlie have each personally put over 75% of their overall net worth into a single opportunity.

What Warren and Charlie understood was this:

In life, if you're lucky, you will have just a handful of opportunities to really make it big.

That's it.

I say again - there will only be a few times in your whole life that the rest of the world undervalues something that you know is better than average.

The key is to prepare yourself so that when those opportunities come, you're in a position to seize them.

If you have good judgement, and you know the opportunity is there, GO ALL IN.

The wise bet HEAVILY when they have the odds in their favor, and the rest of the world doesn't.

It’s that "simple".

Yes, you should also know the edges of your own competency (if you think you know more than you do, you'll end up in a lot of trouble).

But once you've identified those, sit back and wait.

In Warren's words,

"We try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his "best" cell, he knew, would allow him to bat .400; reaching for balls in his "worst" spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame, while swinging indiscriminately would mean a ticket to the minors."

So here's to you getting a fat pitch in 2024.

I hope you're well prepared, and have the courage to swing out of your shoes when it comes.
​

-Mike

​

PS. We won't be sending a newsletter next Friday, Dec 29th. Enjoy the Holidays, and thank you for a wonderful year. Talk to you again in 2024.

PPS: Here is some of the content that inspired this week's newsletter:

• Founders Podcast episode #329 (this is quickly becoming one of my favorite podcasts. David Senra does an incredible job)
• Warren and Charlie at the 1996 Berkshire Hathaway annual meeting.
• Charlie on diversification.
• Warren and Charlie talking about the times they put 75%+ of their net worth into single opportunities.

Niche Twins newsletter sent weekly on Fridays at 8:30 AM ET

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