How your portfolio diversification may turn into ‘di-worsification’? Ace investor Charlie Munger explains

Late billionaire investor Charlie Munger once warned investors against excessive portfolio diversification, calling it “di-worsification” — a term he used to describe over-diversifying investments to the point where returns and conviction both suffer.

A five-year-old video clip from the Daily Journal Annual Meeting has resurfaced on social media platform X, bringing renewed attention to Munger’s investing philosophy at a time when retail investors trade with caution amid worries over the global geopolitical tensions.

In the clip, the Vice Chairman of Berkshire Hathaway, Charlie Munger said many investors mistakenly believe that owning a very large number of stocks makes them more sophisticated investors.

“A lot of people think that if they have 100 stocks, they're investing more professionally than they are if they have four or five. I regard this as insanity, absolute insanity,” Munger said.

According to him, investors are often better off focusing on a handful of businesses they truly understand rather than building an excessively broad portfolio without deep knowledge of individual companies.

What did Charlie Munger mean by ‘di-worsification’?

Munger argued that excessive diversification can dilute portfolio quality and reduce the impact of high-conviction investments. While diversification is traditionally considered a risk-management strategy, overdoing it may lead investors to allocate capital into mediocre businesses merely for the sake of owning more stocks.

He said it is easier to identify a few high-quality opportunities where an investor has strong conviction than to accurately track and evaluate dozens or even hundreds of companies simultaneously.

“I’m way more comfortable owning two or three stocks, which I think I know something about and where I think I have an advantage,” Munger said.

The concept of “di-worsification” essentially highlights the danger of confusing quantity with quality in investing.

Why diversification still matters

Financial experts generally agree that diversification remains important — especially for retail investors who may not possess the research capabilities or risk appetite of seasoned investors.

A diversified portfolio helps reduce company-specific and sector-specific risks. If one stock or sector underperforms sharply, losses can potentially be offset by gains elsewhere in the portfolio.

However, the key takeaway from Munger’s comments is that diversification should be meaningful and strategic rather than random accumulation of stocks.

Munger, who was widely regarded as the intellectual force behind Berkshire Hathaway alongside Warren Buffett, consistently advocated long-term investing, patience, and concentrated bets on high-quality businesses.

His remarks continue to resonate with investors globally, particularly in volatile market conditions where disciplined portfolio construction often matters more than the sheer number of stocks owned.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.