3 principles of the Warren Buffett portfolio

Investor Warren Buffett has been active in the stock market for decades. With a lot of experience has come a lot of education, which he continues to apply in his stock picking. While many new investors make their portfolios complex or difficult to manage, that seems unhelpful to me. Here is how I would learn from the Warren Buffett portfolio when making my own investment choices.

What makes a portfolio

A portfolio suggests a curated, diverse range of constituent elements. A lot of investors think they have a portfolio but what they have is a heavily concentrated collection of shares. For example, maybe they mostly own shares in the company for which they work, or they focus just on one sector or market, such as tech or electric vehicles.

Buffett has seen enough crashes and surprise bankruptcies to know that one can have too much of a good thing. By diversifying across different stocks and business sectors, the Warren Buffett portfolio is structurally designed to apply risk management principles. No one share dominates the portfolio.

That can be difficult. In recent years, for example, the surging Apple share price has meant that it has become an outsized component in the Warren Buffett portfolio. Buffett’s response has been to sell down part of the Apple holding, even while apparently continuing to see strong prospects for the tech company. That is real portfolio management, focussing not just on potential return but also possible risks.

Scale matters to the Warren Buffett portfolio

While Buffett always diversifies his holdings, that doesn’t mean he piles into hundreds of different stocks. There simply aren’t enough hours in the day to monitor so many different holdings. Instead, Buffett invests only occasionally – and when he does, he tends to invest significant amounts of money.

We don’t all have the sort of capital Buffett can deploy, or even close to it. But I think the principle is still useful. Rather than invest in a variety of companies that I think look quite good today, why not wait – years if necessary – to invest the funds in a company I think looks great? The investment returns on great shares are much better than on merely good shares, after all.

To illustrate this, Buffett suggests imagining one could only make 20 investment choices in a lifetime. “Under those rules,” he says, “you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.” Even if one has more than 20 investment opportunities in a lifetime, the conceptual approach here helps sharpen one’s thinking in my view.

The Warren Buffett portfolio and sleeping easily

Buffett has said many times that he wants a portfolio that he doesn’t need to worry about, even if the stock market were to close for years. He’d be confident that his shares in companies with great futures would ultimately show their value.

If a company has such uncertain prospects, unclear accounting or worrying management that it causes him to lose sleep at night, it doesn’t get a place in the Warren Buffett portfolio. Choosing the right shares is critical to Buffett’s success as an investor.