Learn From Warren Buffett’s Diversification

BRK.B - Berkshire HathawayOne of the investing principle we are thought and read about is to diversify our portfolio by sector and by asset allocations. It’s one of the selling factors used by financial advisors when it comes to the mutual funds industry or risk management. Find our what is in Warren Buffett’s portfolio to see if diversification plays a role in his investment strategy.

I personally track my diversification with my portfolio tracker and attempt to keep my holdings within a range of my targets. Warren Buffett’s diversification can teach you to follow your instinct and to learn what works for you. As I refined my investing strategy over the past years, I have usually adjusted my diversification slightly to reflect what works for my investing approach.

Warren Buffett’s Portfolio

Below is Mr. Buffett’s portfolio as of March 25, 2017. The source of the data is from Berkshire Hathaway’s 13F Filling. There is a total of 47 holdings that is managed within Berkshire Hathaway’s portfolio to put it in perspective with the number of stocks you hold in yours.

Diversification is protection against ignorance. It makes little sense if you know what you are doing.
– Warren Buffett
AALAmerican Airlines Group Inc.
AAPLApple Inc.
AXPAmerican Express Company
AXTAAxalta Coating Systems Ltd.
BKBank of New York Mellon Corporation
CHTRCharter Communications Inc.
COSTCostco Wholesale Corporation
DALDelta Air Lines Inc.
DVADaVita Inc.
FOXATwenty-First Century Fox Inc.
GEGeneral Electric Company
GHCGraham Holdings Company
GMGeneral Motors Company
GSGoldman Sachs Group Inc.
IBMInternational Business Machines Corporation
JNJJohnson & Johnson
KHCThe Kraft Heinz Company
KOCoca-Cola Company
LBTYALiberty Global plc Class A Ordinary Shares
LBTYKLiberty Global plc
LILALiberty Global plc
LILAKLiberty Global plc
LSXMALiberty Media Corporation Series A Liberty SiriusXM
LSXMKLiberty Media Corporation Series C Liberty SiriusXM
LUVSouthwest Airlines Company
MAMastercard Incorporated
MCOMoody’s Corporation
MDLZMondelez International Inc.
MONMonsanto Company
MTBM&T Bank Corporation
PGProcter & Gamble Company
PSXPhillips 66
QSRRestaurant Brands International Inc.
SIRISirius XM Holdings Inc.
SNYSanofi American Depositary Shares
TMKTorchmark Corporation
UALUnited Continental Holdings
UPSUnited Parcel Service Inc.
USBU.S. Bancorp
USGUSG Corporation
VVisa Inc.
VRSKVerisk Analytics Inc.
VRSNVeriSign Inc.
VZVerizon Communications Inc.
WBCWabco Holdings Inc.
WFCWells Fargo & Company
WMTWal-Mart Stores Inc.

Warren Buffett’s Diversification

There are a couple of ways to look at the diversification of a portfolio. The first is to look at the number of stocks in a sector. It tends to highlight the sectors that have strong and stable businesses. See below for the number of stocks held in each sectors.

Mr. Buffett and his team carefully select all of their holdings. Here is a word of wisdom at the center of their stock selection process.

Price is what you pay. Value is what you get.
– Warren Buffett

Please note that the sectors were identified as per the TSX. I like to use the same source for my sector tracking which is currently the TSX since it covers all the major North American stock exchange.

Warren Buffett - Diversification by Sectors

It’s clear that Warren Buffett and his team like the Financial Services sector. In fact, they like the credit cards companies since they hold all three major credit card companies. Consumer Defensive is the next big sector which include companies like Costco (NYSE:COST) or Wal-Mart (NYSE:WMT).

Consumer Cyclical and Communication Services are misleading as Berkshire Hathaway hold many different stocks from Liberty Global and Sirius Media. As for the Industrial sector, the addition of 3 airline companies to the portfolio has boosted the number of stocks for that sector.

Warren Buffett - Diversification by Value

The second way to look at diversification is by market value for each sector.  If we follow the money, we can see that Buffett puts 80% of his money in 3 sectors; Financial Services, Consumer Defensive, and Technology. It is much more revealing when it comes to the type of businesses Buffett prefers. My investing strategy has also been leaning towards his top two sectors. It more easily fit my 7 rules of investing.

All in all, diversification is a matter of exposure and risk. It may or may not matter to you but the reason I track it is to understand my overall exposure to a sector and to also understand when a sector is out of favor as a way to systematically find opportunities.

Here is a quote to leave you with from one of the best investor of all times.

Wide diversification is only required when investors do not understand what they are doing.
– Warren Buffett