Warren Buffett Says If You Can Identify 6 Wonderful Businesses, 'You're Going To Make A Lot Of Money' — But Investing In A 7th Would Be A 'Terrible Mistake'

In 1998, during a talk with students at the University of Florida, investment guru Warren Buffett shared a piece of advice that remains as relevant today as it was then. He argued against the common practice of over-diversification in investment portfolios. 

Instead, Buffett suggested a more focused approach, emphasizing the value of investing in a small number of thoroughly understood and carefully chosen companies. “If you can identify six wonderful businesses, that is all the diversification you need, and you’re going to make a lot of money,” Buffett said. He warned that spreading investments too thinly across too many opportunities — a seventh best idea, so to speak — would likely be a “terrible mistake.” 

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"Very few people have gotten rich on their seventh best idea," Buffett said. According to Buffett, investing that money in the first business pick would be far more lucrative. 

Buffett’s advice highlights the importance of quality over quantity in investment choices, suggesting that a deep understanding and conviction in a few select investments can lead to significant wealth creation. This approach has been a cornerstone of his investment strategy, he said, noting that he avoids diversification for the sake of diversification. In contrast, he referred to his friend Walter, who adopts a more diversified approach, as “Noah,” for owning a little bit of everything.

Buffett's advice underscores a fundamental investment philosophy: Knowing your investments inside and out is crucial. It’s a strategy that prioritizes intense research and a strong belief in the companies you choose to invest in. 

Buffett’s insights extend beyond identifying top investment opportunities, emphasizing that success in investing doesn’t solely hinge on spotting the best ideas. While such ideas are critical, Buffett also highlights the necessity of being naturally inclined toward investing and the element of luck. Reflecting on his journey, he shared his gratitude for the fortuitous aspects of his life — being born with a predisposition that aligns well with the market economy, which he acknowledged played a significant role in his success. 

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“I’ve been lucky to be born where I was … lucky with parents, lucky with all kinds of things and lucky to be wired in a way that in a market economy pays off like crazy for me,” he said.  His innate skills were particularly well-suited for success within a market-driven system, a privilege not universally shared. 

This blend of skill, strategic focus and acknowledgment of fortune forms the crux of Buffett’s philosophy, underscoring the comprehensive approach needed for truly successful investing.

For investors, especially those working with normal capital and who have a keen insight into their selected fields, Buffett’s guidance offers a blueprint for potential success. By focusing on your best ideas, rather than diluting attention and resources across too many, the likelihood of achieving substantial returns on investment increases.

Those who might not be naturally “wired” for investing may want to consult with a financial advisor for advice tailored to them. A financial adviser can help navigate the complexities of the investment world, ensuring that decisions are made with a comprehensive understanding of the market and your personal financial goals. This step is crucial for people looking to maximize their investment potential while aligning with Buffett’s principles of selectivity and deep understanding. 

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