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what do cake and underwear stocks refer to?
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joetaxpayer's answer is dead on... but let me give my own two cents with a little bit of math. otherwise, i personally find that people talking about diversified portfolios tends to be full of buzzwords.  let's say that buffett's investments are $10 million. he would like to earn ≥7% this year, or $700,000.  he can invest that money in coca-cola//underwear, which might return: or he can invest in "genius moves" that will make headlines: (like buying huge stakes in goldman sachs), which might return: and he makes plays for the long haul based on the expected value of the investments. so if he splits it 50/50... ($5 million/ $5 million), then his expected value is 822,250: by diversifying, he does reduce the expected value of the portfolio... (he is not giving $10 m the chance to turn into $1.5 million or $2 million for him!). the expected value of that shock-and-awe portfolio with all $10 million invested in it is $1.2m. by taking less risk... for less reward... his expected return is lower. but his risk is lower too.  scale this example back up into the $100 million or billion range that buffett invests in and that extra margin makes the difference.  in the context of your original article, the lower-risk 'cake and underwear' investments let buffett go big on the things that will make 20%+ returns on billions of dollars, without completely destroying his investment capital when things take a turn for the worse.
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