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“Diversification is a protection against ignorance. It makes little sense if you know what you are doing.” – Warren Buffett

Warren Buffett is regarded as one of the most successful investors in the world, consistently achieving long-term returns through a simple yet disciplined investment philosophy.
In this article, we’ll explore Buffett’s portfolio strategy and dividend stock investment principles, as well as how individual investors can put these into practice.

1. Buffett’s Portfolio Strategy

1-1. Concentrated Investment vs. Over-Diversification

Buffett warns against excessive diversification, instead favoring a strategy of concentrating on a small number of high-quality businesses he understands thoroughly.
He famously advises, “If you can’t deeply analyze and understand more than 10 companies, you’d be better off investing in an index fund or ETF.”

Note: In Buffett’s own portfolio, the top 5 stocks account for about 70%, and the top 10 make up nearly 90%. This level of concentration is highly aggressive—so much so that even many professional investors find it hard to follow.
Most investors generally keep their exposure to any single stock below 10%.

1-2. Long-Term Holding Strategy

Buffett ignores short-term price fluctuations and follows a “buy great companies at fair prices and hold them for the long term” approach.
For average investors, he also recommends long-term investments in S&P 500 ETFs such as SPY or VOO.

1-3. Cash Allocation Management

Buffett treats cash as an opportunity reserve, holding cash during overheated markets and deploying it to buy quality stocks during downturns.
This philosophy is summarized by his quote: “When it rains gold, put out the bucket, not the thimble.”

Note: Because Buffett concentrates 70% of his portfolio in just a few stocks, he typically maintains around 40% of his portfolio in cash. This cash often comes from dividends and insurance float, which allows him to seize opportunities when markets drop.

2. Dividend Stock Investment Principles

2-1. Stable Dividend Growth

Buffett favors companies that consistently grow their dividends.
Dividend-growth stocks provide reliable cash flow even during economic downturns and can significantly enhance long-term returns.
Examples: Coca-Cola (KO), Chevron (CVX).

2-2. Payout Ratio Analysis

A company with an excessively high payout ratio may have limited growth potential.
Buffett prefers companies with a moderate payout ratio of 40–60%.

2-3. ROE and Free Cash Flow

Buffett evaluates ROE (Return on Equity) and Free Cash Flow (FCF) to assess whether a company’s dividends are sustainable.
Note: Buffett considers companies with an ROE above 15% to be excellent, while I personally focus on companies with ROE above 20% for my own portfolio.

3. Practical Strategies for Individual Investors

Combine ETFs and Dividend-Growth Stocks:
Mix S&P 500 ETFs with dividend-growth stocks like SCHD or VIG.

Adopt a Long-Term Perspective:
Focus on the power of compounding instead of chasing short-term price swings.
Develop Analytical Skills:
Study financial statements, ROE, FCF, and dividend growth rates to build a strong investment foundation.

4. Conclusion – Buffett’s Investment Philosophy

Buffett’s strategy isn’t flashy, but it’s a proven way to generate steady, long-term returns.
His philosophy can be summed up in one simple sentence:

“Understand a good business, buy it at a fair price, and hold it for the long term.”

For individual investors, a long-term approach using dividend stocks and ETFs can be a practical and effective way to build wealth.

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