If we're talking about great investors, three names that immediately come to mind are Warren Buffett, Bill Ackman, and Michael Burry.
Buffett and his company Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) have routinely beaten the market since Buffett took over the company in 1965. Ackman and his fund Pershing Square Capital Management have generated 17% annualized returns since the fund launched in 2004. And Burry is famous for his call that the housing bubble would collapse prior to the Great Recession, a bet that would yield him and his investors an $800 million profit.
Yes, all three of these investors have a proven track record and decades of experience. But if you look at all three of their portfolios, you'll also notice one common trait.
They don't preach diversification
Common investing advice you've probably heard time and time again is to diversify your portfolio. That way if one of your companies goes out of business, you are not completely exposed to its stock. Don't have all of your eggs in one basket.
Image source: The Motley Fool.
But Buffett, Ackman, and Burry really throw this conventional wisdom out the window. Berkshire reports owning 49 stocks and invests hundreds of billions into these assets. But almost 60% of Berkshire's portfolio of publicly traded stocks is in just three companies: Apple (AAPL 0.52%), Bank of America (BAC -1.07%), and Chevron (CVX 1.04%).
Ackman and Pershing Square have a much smaller portfolio than Berkshire. It's valued at around $9 billion, but there are only six stocks in it. The home improvement retailer Lowe's (LOW -0.14%) makes up more than 23% of the portfolio.
Finally, Burry's fund Scion Asset Management is much, much smaller than Berkshire or Pershing and is currently valued at about $47 million. The fund only owns nine stocks, and the government service provider GEO Group (GEO -1.86%) makes up about a quarter of the portfolio.
So none of these great investors seem to really worry about diversification too much. Buffett has even said he's not a big fan of the practice. "You know, we think diversification is -- as practiced generally -- makes very little sense for anyone that knows what they're doing... it is a protection against ignorance," the Oracle of Omaha has famously said.
Buffett has also been a big believer in seizing opportunity and going in big when you see the market pricing a stock incorrectly, because these opportunities do not present themselves every day.
Should you follow their lead?
While many might perceive Buffett's quote on diversification as arrogant or elitist, I think it's important for investors to really heed his advice.
If you are a retail investor, work a full-time job, and have a family, then there's a good chance you simply do not have the time or resources to put in the required research to go all in on just a few stocks.
So when you invest, you may not have a complete 360-degree view of an individual company and all the different scenarios it may face under various economic conditions. That doesn't mean you can't do a lot of research and arrive at an informed thesis that leads you to invest. It just means you may want to protect against some downside, in which case diversification makes a lot of sense.
But for investors like Buffett, Ackman, and Burry, who are extremely skilled and have lots of time and resources to study the market and stocks, they really need to feel almost 100% confident in their picks because their investors are putting a lot of money into their funds. But this is why they make the big bucks and regularly beat the market.
