Changing My Mind on the Importance of Concentration

I used to believe that concentration was one of the keys to investment success, but I changed my mind.

It took me a long time to come to terms with the idea that a diversified fund can outperform a concentrated one.

After all, Warren Buffett has said, “If you can identify six wonderful businesses, that is all the diversification you need and you're going to make a lot of money. And I can guarantee you that going into a seventh one rather than putting more money into your first one, it’s got to be a terrible mistake.”

Over my career, the biggest challenge I faced in running concentrated portfolios was that my conviction wasn’t a particularly reliable predictor of which investments would perform best. Often, it was the smaller positions with a lot of uncertainty that delivered the biggest returns.

Looking at my track record over my career, I did slightly better with portfolios that had 60 positions rather than 40.

For Buffett, investing with permanent capital, often buying whole businesses, concentration makes a lot of sense. For a conventional portfolio manager held accountable to shorter assessment periods, the volatility and drawdowns of an ultra-concentrated portfolio are problematic.

Studying the wisdom of investment greats is important, but we should be willing to borrow the bits that work best and develop our own approach.

There are lots of paths to investment success.