2008: Diversification is for the know-nothing investor; it’s not for the professional.

AUDIENCE MEMBER: I’m Isaac Dimitrovski (PH) from New York City. Mr. Buffett, it’s great to be here.

I’ve read that there were several times in your investing career when you were confident enough in one idea to put a lot of your money into it — say, 25 percent or more.

I believe a couple of those cases were American Express and the Washington Post in the ’70s. And I’ve heard you discuss your thinking on those.

But could you talk about any of the other times you’ve been confident enough to make such a big investment and what your thinking was in those cases?

WARREN BUFFETT: Charlie and I have been confident enough — if we were only running our own net worth — I’m certain a very significant number of times, if you go over 50 years, there have been a lot of times when you would have put at least 75 percent of your net worth into an idea. Wouldn’t there, Charlie?

CHARLIE MUNGER: Well, but 75 percent of your worth outside Berkshire has never been a very significant amount.

WARREN BUFFETT: No. Well, I’m going back — let’s just assume it was. (Laughter)

Let’s just assume you didn’t have Berkshire in the picture. There have been times — I mean, we’ve seen all kinds of ideas we would have put 75 percent of our net worth in.

CHARLIE MUNGER: Warren, there have been times in my life when I’ve had more than a hundred percent of my net worth invested in things.

WARREN BUFFETT: That’s because you had a friendly banker; I didn’t. (Laughter)

That — there have been times — well, initially, I had 70 — several times I had 75 percent of my net worth in one situation.

There are situations you will see over a long period of time. I mean, you will see things that it would be a mistake — if you’re working with smaller sums — it would be a mistake not to have half your net worth in.

I mean, there — you really do, sometimes in securities, see things that are lead-pipe cinches. And you’re not going to see them often and they’re not going to be talking about them on television or anything of the sort, but there will be some extraordinary things happen in a lifetime where you can put 75 percent of your net worth or something like that in a given situation.

The problem has been the guys that have put 500 percent of their net worth in. You know, I mean, if you look at — just take LTCM. Very smart guys. Very decent guys. Some friends of mine. High grade. Knew their business.

But they put, you know, maybe 25 times their net worth into things that were a cinch, if they hadn’t have gone in that heavily. I mean, they were in things that had to converge, but they didn’t get to play out the hand.

But if they’d have had a hundred percent of their net worth in them, it would have worked out fine. If they would have had 200 percent of their net worth in it, it would have worked out fine. But they instead went to, you know, maybe 2,500 percent or something like that.

So there are stocks — I mean, actually, there’s quite a few people in this room that have close to a hundred percent of their net worth in Berkshire, and some of them have had it for 40 or more years.

Berkshire was not in a cinch category. It was in the strong probability category, I think.

But I saw things in 2002 in the junk bond field. I saw things in the equity markets.

If you could have bought Cap Cities with Tom Murphy running it in the early — in 1974, it was selling at a third or a fourth what the properties were worth and you had the best manager in the world running the place and you had a business that was pretty damn good even if the manager wasn’t.

You could have put a hundred percent of your net worth in there and not worry. You could put a hundred percent of your net worth in Coca-Cola, earlier than when we bought it, but certainly around the time we bought it, and that would not have been a dangerous position.

It would be far more dangerous to do a whole bunch of other things that brokers were recommending to people.

Charlie, do you want to —?

CHARLIE MUNGER: Yeah. If you — students of America go to these elite business schools and law schools and they learn corporate finance the way it’s now taught and investment management the way it’s now taught.

And some of these people write articles in the newspaper and other places and they say, “Well, the whole secret of investment is diversification.” That’s the mantra.

They’ve got it exactly back-ass-ward. The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple.

Diversification is for the know-nothing investor; it’s not for the professional.

WARREN BUFFETT: And there’s nothing wrong with the know-nothing investor practicing it. It’s exactly what they should practice. It’s exactly what a good professional investor should not practice. But that’s — you know, there’s no contradiction in that.

It — a know-nothing investor will get decent results as long as they know they’re a know-nothing investor, diversify as to time they purchase their equities, and as to the equities they purchase. That’s crazy for somebody that really knows what they’re doing.

And you will find opportunities that, if you put 20 percent of your net worth in it, you’ll have wasted the opportunity of a lifetime, you know, in terms of not really loading up.

And we’ve had the chance to do that, way, way in our past, when we were working with small sums of money. We’ll never get a chance to do that working with the kinds of money that Berkshire does.

We try to load up on things. And there will be markets when we get a chance to from time to time, but very seldom do we get to buy as much of any good idea as we would like to.