Portfolio diversification

Warren Buffett’s Portfolio diversification

This blog post is all about the US business giant Warran Buffett’s empire and how he has diversified his portfolio in order to maintain success.

The seminal author Markowitz who suggested diversifying your portfolio would reduce the risk associated with investing created the idea behind this theory. The theory is that spreading the risk of investment across a number of businesses will counteract any unexpected bad news from one business with good news by another within your portfolio. (Watson & Head, 2013).  However investing in shares will always have an element of systematic risk associated with it, and therefore no matter how many businesses one invests in, there is always a possibility of making a loss on your investment.

Recently Warren Buffett secured a deal with German Motorbike Company Detlev Louis Motorradvertriebs to add it to the swelling collection of business’s Berkshire Hathaway owns. The Business giant said this is a smaller acquisition than normal however he is viewing it as a door opener to Germany and the rest of Europe, which will allow him to invest larger sums into the continent.

Berkshire Hathaway is the third largest company in the US, however it is not as well known outside of the states and that is because only 15% of the conglomerate’s revenue comes from the rest of the world. Warren Buffett recognizes this as an issue as in line with portfolio theory having investments that are correlated may have short-term benefits; however in the long term the risk it greater. This is not to say the business hasn’t diversified its portfolio within the US as that would be wrong, it has a very substantial and diversified portfolio with investments in everything from energy, food and drink, media, Banking, Insurance and finance to health and manufacturing (Berkshire Hathaway, 2015).

It is clear from the number of industries Buffett has invested into that he deems diversification as a means to reduce unsystematic risk a key strategy. This is supported by they release of the budget assigned to investments and acquisitions by the company coming to a whopping $56bn! (Foley, 2015). What this shows is that Buffett is looking to significantly expand his empire internationally into other financial markets such as the FTSE 100. This will allow opportunities for the business to growth and increase revenues however it will also begin to increase the percentage of the business’s revenues that come from outside the US. This further diversification will increase the business’s security as a long lasting company as it will make it less receptive to domestic financial fluctuations such as the financial crisis of 2008, that negatively impact US business’s. 

References

Berkshire Hathaway. (2015). BERKSHIRE HATHAWAY INC list of subsiduaries. Retrieved 3 7, 2015, from BERKSHIRE HATHAWAY : http://www.berkshirehathaway.com/subs/sublinks.html

Foley, S. (2015, Feburary 20). Buffett dons biker gear with German deal. Retrieved March 7, 2015, from Financial Times: http://www.ft.com/cms/s/0/f8faf4f6-b6f1-11e4-95dc-00144feab7de.html#axzz3aISVhmJy

Watson, D., & Head, A. (2013). Corporate finance: principles and practice. Harlow: Pearson.