'Diversification For Idiots?' – Valuation Guru Challenges Charlie Munger's Thoughts on Putting All Your Eggs in One Basket on CNBC

Charlie Munger's comments on stock portfolio diversification have made waves in the investing world for decades. The late legendary investor repeatedly said that diversification is for "idiots" who don't know what they are doing. 

During a shareholder meeting in 2019, while answering a question, Munger said:

"The idea of diversification makes sense to a point – if you don’t know what you’re doing. If you want the standard result and don’t want to end up embarrassed, then of course, you should widely diversify. But nobody is entitled to a lot of money for holding this view. It’s like knowing two plus two is four. Any idiot can diversify a portfolio."

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During a 2017 event, Munger said:

"Diversification is for those who don't know anything. Warren (Warren Buffett) calls them know-nothing investors. If you are capable of figuring out something that will work better, you're just hurting yourself looking for 50 (stocks) when three will suffice. Hell, one will suffice if you do it right."

Are Charlie Munger's Thoughts on Diversification Relevant Today?

Charlie Munger died in November 2023 and at the time of his death, he was worth about $2.6 billion. Munger was a genius and his stock-picking skills, wisdom and life will remain a topic of interest for generations to come. However, his blunt thoughts on diversification aren't shared by many. Not everyone can bet their life savings on two or three stocks, especially beginners with a limited budget.

The "Dean of Valuation" and Finance Guru's Counterargument

Aswath Damodaran, famously known as the "Dean of Valuation" on Wall Street, is a professor of finance at the Stern School of Business at New York University. The valuation guru is a nine-time “Professor of the Year” winner at NYU and has written several notable books, including Investment Valuation, The Little Book of Valuation and The Corporate Lifecycle: Business, Investment and Management Implications, among many others.

Talking about Apple in a recent CNBC program, Damodaran was asked why Berkshire Hathaway is selling the iPhone maker's shares. The professor said he believes it was a portfolio "concentration issue." 

"When you have a third of your portfolio trapped in one company, it's a very dangerous place for anybody to be. So I think the pruning reflected that overconcentration."

The program host then reminded Damodaran about Charlie Munger's thoughts on diversification and his advice to put all your eggs in one basket and watch it carefully. She referred to the famous quote often attributed to Buffett and Munger, where they said you should keep all your eggs in one basket but watch that basket closely.

Damodaran responded by countering Munger's idea, asking:

"Would you take 30% of your money now and buy any one stock, no matter how great it is? And I'd wager he'd say no."

Damodaran emphasized the need for consistency in investing approaches.

"It almost seems like there are two sets of rules: One for investments we are going to make and one for investments we've already made. I think we need to be consistent."

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Charlie Munger's Thoughts on Finance Professors and Portfolio Theory

If only Charlie Munger were here today to share his thoughts on the professor’s argument.

However, Munger was always critical of modern portfolio theory at universities and was skeptical of finance professors. At the Wesco Annual Meeting in 2009, while discussing the issue of portfolio diversification, Munger said:

"By and large, I don't think too much of finance professors. It is a field with witchcraft. I think a lot of physics and engineering professors. They try to teach it like physics, but it doesn't yield to that. I never went to university with finance professors. Finance professors all believe in diversification, while we try to beat the average. If you buy a dob of everything, that is different from buying something you know something about. That is a different fountain than I want to drink in."

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