Do you want to become “very rich”? Charlie Munger and Warren Buffett say you only need 3 great businesses – not 30 stocks

During a Berkshire Hathaway shareholder meeting a few years ago, Warren Buffett and Charlie Munger were asked a simple but revealing question: If someone in your local town owned three to five businesses, such as a bakery and dry cleaners, you’d probably think they were pretty well diversified. So why do financial experts often recommend holding 20 to 30 stocks in a portfolio? The questioner was curious about Buffett’s thoughts on diversification and how he approaches focusing his investments.

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Buffett has not hesitated to challenge conventional wisdom. He pointed out that while holding a wide range of stocks is often recommended, it is more of a safety net for those who do not know how to properly evaluate businesses. “Diversification is a hedge against ignorance,” Buffett said. “If you know how to analyze businesses and value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks.” In other words, if you’ve done your homework and really understand a few outstanding companies, spreading your bets on dozens of stocks could dilute your profits.

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Buffett isn’t just talking theoretically. He practices what he preaches. At one point, he mentioned that he only holds one title in his portfolio – the one he knows best. And when it comes to Berkshire Hathaway, it feels perfectly fine to focus investments on just a few stellar businesses. “I could pick three of our businesses and I’d be very happy if they were the only businesses we owned and I had all my money in Berkshire,” he added.

Then came Charlie Munger, never one to shy away from a clear opinion. He didn’t just challenge modern financial theories; categorically rejected them. “Much of what is taught in modern corporate finance courses is bullshit,” Munger declared, drawing laughter from the crowd. His idea? Complex models and theories might sound impressive, but they often add little value to real-world investments.

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Munger also stressed the importance of sticking with what you know. “If you find three wonderful businesses in your life, you will become very rich,” he said. And unlike the complicated theories taught in finance courses, this approach is simple, straightforward and, according to Munger, far more effective.

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Buffett and Munger’s advice is clear: if you really understand the businesses you’re investing in, you don’t need to spread your money around dozens of stocks. Instead, focus on a few outstanding companies that you know inside and out. Diversification can help you avoid big mistakes, but it can also prevent you from achieving the extraordinary results of deep, focused investments in just a few high-quality businesses.

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So the next time you’re building your portfolio, remember the wisdom of Buffett and Munger. Don’t let the fear of risk lead you to dilute your potential profits. Instead, focus on finding those few great companies that you understand and believe in—and then, as Munger might say, ignore the crap.

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