Property vs. Shares (again) - but do shares work in reality?

Sim, yes business is what made people wealthy, but what did the business people do with their money? Did they buy up 100 IP's to further their wealth? No they didn't, they invested in a selection of investments and funnelled their earnings into these investments.

Why should a poor person do any different? The stratagie should remain the same. Just because your poor, you don't reason that your only way to make money is to put all on a casino table, because thats the only way for you to get there..

Anyone can make money if they focus their earnings into building assets, and thats if its buying IP's, shares or even just paying down your family home.. The person who ends up poor in the end is the one who wastes money on cars, holidays, boats and just day to day rubbish they dont need.

 

Mark

 

Mark,

Spot on !!!!

PS:

“Wide diversification is only required when investors do not understand what they are doing.” = Warren Buffett
Warren Buffett quotes

"Risk comes from not knowing what you're doing.” = Warren Buffett
Warren Buffett quotes

Also: ” Diversification is a hedge for the ignorant” = William O’Neil

 

WB is an advocate of extreme diversification.... or little at all.

Diversification through index funds for people who don't have an edge, which is pretty much everyone.

 

Is he? Quote please.

Mark

 

Yes he is.

In here amongst other places if I remember correctly.. Long video.

Warren Buffett MBA Talk

Just goog for WB + index funds or something similar as well.

Probably the best advice rarely followed I reckon, don't even follow it myself.

 

Thanks Tropo - much appreciated.

Ilori

 

it's just after 1h 5min

 

Maybe it's difficult to even hold WB up as an example of a share investor in the sense we normally talk about it. I don't know much about him, but from what I understand he is a businessman as much as he is an investor - and has some genius/ability that sets him apart.

Additionally, he's probably so influential now that he can effectively manipulate markets to achieve abnormal gains. Example, he can get on TV and say how terrible the crash is and America could experience a prolonged deep recession - but he's most likely buying companies as he's telling the masses how bad things are - then when he has done his buying he can start talking about cycles and that this is just another cycle and he can see a recovery in a couple of quarters (or whatever suits).

Good on him for getting to where he is though - certainly an awesome effort.

 

Good points Sim and interesting you say that. After reading BRW Rich List recently, I started to think that a lot of the people on the list concentrated their wealth to a large extent. I'm just going off memory here - but I don't recall any of them talking about holding a diversified portfolio. Rather, they had large chunks of their money in one (or two?) company or venture. Probably a twist to the 'eggs in basket' theory - these people seem to put most of the eggs in the best basket they can find then watch it like a hawk

 

Insight,

Just because WB says that some people are better off in funds, DOES NOT make him an advocate of extreme diversification. He's simply acknowledging that some people are not cut out for investing and are better off putting their money into funds for professionals to invest.

As he says in the video, "if you are not looking to beat the market by a huge amount, then you are better off with extreme diversification'. That is NOT advocating diversification. That is stating that most people are not cut out to invest and they should spread their risk. The best way to spread that risk is to put that money into funds.

He's not saying 'extreme diversification is a good thing'. You have to take what he has said there in the context of the whole statement.

Mark

 

What's the difference between suggesting something and advocating it?

I agree with the ideas of your post, and it's what I meant to say myself.

Edit ** sorry.. actually I don't agree with the following statement:

He's not saying 'extreme diversification is a good thing'. You have to take what he has said there in the context of the whole statement.

 

I think diversification is a luxury and just gets in the way of building wealth quickly from a low base.

Once you have something substantial to protect and nurture then it's a truly wonderful and nescessary thing.

 

As he has said many times, diversification is a hedge against ignorance. He's merely acknowledging that diversification via funds for most people is preferable to them investing themselves. In other words, my understanding of what he is saying is this: 'If you are going to invest your money and you're not aiming to beat the market by a wide margin (as in, you just wanna set and forget) you're better off putting it into a diversified fund rather than trying to invest on your own.' I happen to absolutely agree with that.

That's just acknowledging people's shortcomings, it's not saying 'extreme diversification is a good thing'.

Mark

 

Ok... how about this?

Why most of us should diversify-- Warren Buffett - Early Retirement Forums

He hates the 2/20 crowd.. which is why the funds he suggests are index funds! Which are truly diversified.

 

I think he's saying it's a very good thing, just not best for him or the precious few (really few) who can generate alpha.. Anyway it's a word battle and the good ideas are still good ideas regardless of who is correct between us!

 

He's just reinforcing what I've stated in my last post. What he is saying is:

'If you know what you're doing, then concentrate your portfolio. If you don't know what you're doing, put your money into funds.'

He's not advocating diversification as a strategy, he's advocating the view that people who don't know how to or don't have the inclination to invest on a professional level should hand their money over to professional managers and let them invest their funds because that option is the one that is the least risky for them. He's saying 'save yourself from yourself' as it were.

In my view, you're focussing too much on one word and not looking at what he is saying as a whole.

Mark

 

He's not saying hand your money over to any fund manager, he specifically mentions index funds.

If it's your game concentrate, if it's not diversify. To me that's advocating diversification as a good strategy. Investing in an index fund = diversification in stocks.

 

Buffett's answer:

I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification.