I'm really surprised he said that. It flies in the face of diversified risk and everything it affects, like Sharpe ratios.

Buffet is not widely recognized as a fan of any form of the efficient market hypothesis in general or of diversification-reduces-risk specifically.

https://www8.gsb.columbia.edu/articles/columbia-business/sup...

"The way to become rich is to put all your eggs in one basket and then watch that basket." - Andrew Carnegie

The way Buffett invests is by reading all day, everyday and once in a while making a very informed investment. Most people haven't even reached the level of staying away from 'sure things' and panic selling during bad news.

How many people would've been able to stay away from IT stocks during the dotcom boom, to even not invest in the company of one of your friends. (Bill Gates and Buffett have known each other since '91)

How often do you, as a 'master', break rules that you would tell a 'apprentice' are immutable?

The common numbers thrown around are that with 20 stocks your portfolio risk is reduced by 70%. The corresponding ratios follow. So in that sense it's not that bad.

Of course that's just one form of risk. The less attractive aspect of a 20 stock strategy comes from the fact that the majority of the market's returns come from very few stocks - The 80/20 rule applies pretty well here. With only 20 stocks you'll probably miss out on the few winners that contribute all the market's gains. It's very easy to end up with a 20 stock portfolio with low risk/variance and low returns.

Of course if you are Buffet, then your goal is to pick 20 stocks that all outperform.

It doesn't mean you can't buy indexes or other diversified assets but rather that you should stick with what you choose and not try to time the market.

I think it's meant to be taken as the number of times you get to change your portfolio.

I don't think so. Buffett is more of a buy to hold forever kind of investor.

One way of thinking about this: Every time you add a new instrument to your portfolio you risk goes down. But return also goes down because there are only a very small number of excellent investments available.