Charlie Munger: “An idiot could diversify their portfolio"

And of course, I'm out performing everybody. I'm 95 years old and I frankly never have a transaction. The answer is I'm right and they're wrong, and that's why it's worked for me and not for them.

I always knew from the very first, I was a little boy, that the opportunities that were important - that were going to come to me - were few. And the trick was to prepare myself for seizing the few that came. This is not the attitude they have in a big investment counseling thing. If they study a million things, they can know a million things and that, and of course, the result is almost nobody can outperform an index.

Whereas I sit here with my daily journal stock, my Berkshire Hathaway stock, my holdings of Lilu's Asian fund, my Costco stock, and of course I'm outperforming everybody. I'm 95 years old and I frankly never have a transaction. The answer is I'm right and they're wrong, and that's why it's worked for me and not for them.

Now the question is: do you want to be more like me or more like them? The idea of diversification makes sense to a point. If you don't know what you're doing and you want the standard result and not be embarrassed, well, of course, you can widely diversify.

Now, nobody's entitled to a lot of money for recognizing that because it's a truism. It's like knowing that two and two equals four. But the investment professionals think they're helping you by arranging a diversification. An idiot could diversify a portfolio and, or a computer for that matter.

But the whole trick of the game is to have a few times when you know that something is better than average and invest only where you have that extra knowledge. And then if you get just a few opportunities, that's enough. What tells you here? You own three securities and JP Morgan Chase owns a hundred. You know, what's wrong with owning a few securities?

Warren always says if you lived in a growing town and you owned stock in three of the best enterprises in the town, isn't that diversified enough? The answer is of course it is. They're all wonderful places.

That fortunes formula, which got so famous, which was a formula to tell people how much to bet on each transaction if you had an edge, and of course the bigger your edge, the more close the transaction was to a certain winner, the more you should bet. And of course, there's mathematics behind it. But of course, it's true. It's perfectly possible to buy only one thing because the opportunity is so great and such a change, or only two or three.

So, the whole idea of diversification when you're looking for excellence is totally ridiculous. It doesn't work; it gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony. I just – who would want to do it?

I don't see why. My father had a client; he was a lawyer in Omaha. He had a client whose husband had a little soap company, and the guy died. My father sold the soap company. This woman was one of the richest people in town in the middle of the depression.

What she had was a little soap company in the biggest mansion in Omaha's best neighborhood. They sold the soap company; she had a mansion in the best neighborhood and three hundred thousand dollars. But dollars in 1930-something was an incredible amount of money.

A little hamburger was a nickel; a big hamburger was a dime, and the all-you-can-eat cafe in Omaha would feed you all you needed to stay alive for two bits a day. I mean, three hundred thousand – well, she didn't hire an investment counselor; she didn't do anything. She's a wonderful old woman, and she just took that and she divided it into five chunks and she bought five stocks.

I remember three of them because I probated her estate. One was almost General Electric, one was Dow, and one was DuPont. I forgot the other two. She never changed those stocks; she never paid any advisor; she never did anything, and she bought some municipal bonds. She never spent her income, and she bought some Minnesota bonds from time to time with the ending.

By the time she died in the 50s, she had a million and a half dollars – no costs, no expenses. I said, "How did you decide to do that?" and she said, "Well," she said, "I thought electricity and chemistry were the coming things." She just chunked it all in and sat on her ass. I always liked that little lawn; my kind of a girl.

But it's rare, you know? But if you stop to think about it, think of all the expense and palabre that she didn't have to listen to and all the trouble she avoided and zero costs. And of course, what people don't realize, because they're so mathematically illiterate, is if you make five percent and pay two of it to your advisors, you're not losing forty percent of your future; you're losing ninety percent.

Because over a long period of time that little difference causes a 90 disadvantage to you. So it's hugely important for somebody who's a long-term holder not to be paying a big annual toll out of the performance.

And of course, there are a few big-time advisors now who are using indexation very heavily, and of course, they're prospering mightily. Every time they get somebody, it's just agony for the rest of the investment counseling business, and this is a very serious problem.

I think these people were used to winning, as old-time value investors, who are now just quitting the profession. That's a very understandable thing to do. I regard it as more noble than staying in with, you know, playing along with the denial.