Sunday, January 16, 2011

Warren Buffett: Diversification Is A Hedge Against Ignorance

"Big money is made by taking meaningful positions when you are certain the odds are in your favor. This requires a high degree of certainty. You can delude yourself into thinking that you know what you’re doing by only investing a trivial amount in a stock relative to your net worth. This is why Buffett says that diversification is a hedge against ignorance. The more you invest this way the more likely it is that your returns will equal that of a stock index. Put another way, taking only small positions is a way of perpetuating overconfidence bias because you can pretend you know what you’re doing when in fact you’re really speculating."

Outstanding Investor Digest, warren buffett

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