Almost everything I try to accomplish when it comes to portfolio construction is a combination of three ideas that I learned from Columbia professor Benjamin Graham, Berkshire Hathaway Vice Chairman Charlie Munger, and Wal-Mart founder Sam Walton.
Benjamin Graham’s theory of diversificationis one of the most basic suggestions that I find compelling to follow. In fact, Graham’s arguments in favor of diversification is so common-sensical that most investors take it for granted that diversification is a given, and the only question thereafter is how to diversify. Most people have moved beyond Andrew Carnegie’s recommendation to “put all of your eggs in one basket, and watch that basket” because they want to continue to make money in the event that something bad happens. If your McDonalds holding starts to falter, you still have Exxon and Chevron pumping out oil dividends for you. If Wal-Mart starts to run into trouble, you have Coca-Cola dividends coming in still. It is a great way to arrange your life so that you can run into trouble with some stocks and still make money due to the heavy lifting performed by the other companies in your portfolio.