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Buffett's Diversification Debate, What Financial Advice Did Vitalik Offer?

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Ethereum co-founder Vitalik recently saw someone mention that since Bill Gates became friends with the stock god Buffett, he has given up many of his original Microsoft holdings and diversified his investments, resulting in a significant reduction in his assets. From this example, he advises against diversification. Vitalik believes that diversification is good and also offers some financial advice. But does the stock god Buffett really endorse diversified investment portfolios?

Does Buffett endorse diversified investment portfolios?

Stock market guru Buffett and Charlie Munger discussed diversified investment portfolios at the 1996 Berkshire Hathaway Annual Meeting. Buffett mentioned:

Diversification is protection against ignorance. It makes little sense if you know what you are doing.

Buffett stated that if you understand how to analyze companies and evaluate their worth, owning 50, 40, or even 30 stocks might be crazy because there may not be that many outstanding companies that one person can understand.

Buffett believes that as long as there are three outstanding businesses, it is enough to yield good returns in one's lifetime, provided that you understand them well enough, and are certain that nothing bad will happen to these three companies. In this scenario, the performance of these three outstanding companies will surpass that of 100 average companies.

Buffett's ten-year bet, no one can beat the market

From the discussion above, we can infer that if you have the expertise and a deep understanding like Buffett, you do not need a large diversified portfolio. Instead, focusing on a few specialized companies can yield good investment returns. In fact, 78% of Berkshire Hathaway's stock portfolio is concentrated in 5 companies, namely Apple (AAPL-US), Bank of America (BAC-US), American Express (AXP-US), Coca-Cola (KO-US), and Chevron (CVX-US).

However, for the average investor, Buffett highly recommends investing in broad market ETFs. In 2007, he initiated a century bet, believing that no fund could beat the market in the long run. Only Ted Seides, a partner at Protégé Partners, took up the challenge.

Ultimately, Buffett designated an ETF tracking the S&P 500 with a return of 125.8%, far surpassing Ted Seides' 36.3% return from his selection of 5 hedge funds.

Buffett has repeatedly stated in shareholder letters:

For the non-professional investors, the best investment is a low-cost index fund.

Vitalik's investment advice

Ethereum co-founder Vitalik also endorses diversified investments and provides the following financial advice:

  • Save enough to cover several years of expenses. Financial stability equals freedom.
  • Do not overly focus on your investment portfolio.
  • Avoid investing with leverage of more than two times.

It seems that Vitalik is also a prudent investor!