Warren Buffett - What Is Wrong with Pop Culture Finance
Diversification is a protection against ignorance … [It] makes very little sense for those who know what they’re doing.
Dare I give a critique of anything that the legendary investor Warren Buffett says. After all, CNBC worships at his feet when it comes to interviews and the mere mention of his name. He has a well respected (deserved) reputation when it comes to investing. Further, his opinion is worth listening to regarding stocks and investments. He has the track record to back up everything that he says. At the same time, he is not without flaws or bad stock picks. Take for instance today - do you think that he regrets buying FACEBOOK given its' almost -20% drop today? Besides, this serves as a good point about taking Pop Culture Finance advice at face value.
Warren Buffett also has a responsibility when it comes to the advice that he gives. That responsibility means knowing your audience. The quote above is what he said about diversifying. The quote might be accurate for those who are mega-rich and actively trade the market professionally. His audience, when he speaks to the media, is mostly average people who are not professional investors and don't invest in individual issues of stock. They invest in mutual funds.
If the king of basketball Lebron James (being a Laker fan I can utter those words) says that every shot you take should be a three point shot, he needs to realize that every aspiring young basketball player in America is hanging on his every word. Obviously, that would be bad advice. The worst thing would be for kids in gyms and playgrounds across America jacking up balls from the three point line because of the opinion of the king. Same goes with the quotes or "advice" that Warren Buffett gives. Incidentally, Mr. Buffett should realize that everything that comes out of his mouth is oftentimes taken as advice, or in the least, a tip.
So now, should every investor take his or her 401 k plan and just invest into stock funds and forget about diversification? Well, not unless you want to live through the downside of that type of strategy. Diversification for the average investor is not dead nor only for the ignorant. Breaking up your investments among different types of investments still makes sense.
He probably has a point for the professional stock picker. That is the problem with Pop Culture Finance which is driven by the media. They make blanket statements (this is bad or this is good) as a blanket statement applying to everyone. That generally speaking is not the truth. Remember don't take "experts" at face value. Generally there is more to be said which is left out of the quote.