What do "cake and underwear" stocks refer to?

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:

* -5% (10% chance) 
* +3% (45% chance)
* +5% (45% chance)

Or he can invest in "genius moves" that will make headlines: (like buying huge stakes in Goldman Sachs), which might return:

* -10% (20% chance)
* +10% (40% chance)
* +20% (40% chance)

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:

($5M * -.05 * .1) + ($5M * .03 * .45) + ($5M * .05 * .45) = $222,250
($5M * -.1 * .2) + ($5M * .15 * .4) + ($5M * .2 * .4) = $600,000

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.