DIVERSIFICATION

"There is one other rule you ought to keep in mind and that is to concentrate, and not only in the Zen sense. Sweet are the uses of diversity, but only if you want to end up in the middle of an average." Adam Smith, the Money Game 1968

“Don’t overstress diversification.” Phil Fisher

"The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor; it’s not for the professional." Charlie Munger

“Statistical analysis shows that security-specific risk is adequately diversified after 14 names in different industries, and the incremental benefit of each additional holding is negligible. We own 18-22 companies to allow us to be amply diversified but have the flexibility to overweight a name or own more than one business within an industry.” Mason Hawkins

“Empirical testing has proved beyond a reasonable doubt that the ‘riskiness’ of a portfolio of 12-15 diverse companies is little greater than one loaded with a hundred or more.” Frank Martin

"The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It’s a very conventional madness. And it’s taught in all the business schools. But they’re wrong." Charlie Munger

"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don‘t diversify personally." Warren Buffett

“If you ever want to get rich you have to be very concentrated. It’s one of the things that I realized when I began investing that most of the great fortunes were made by people who were invested generally in only one thing.” Richard Rainwater

“Two things should be remembered, after purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and overall market risk will not be eliminated merely by adding more stocks to your portfolio.” Joel Greenblatt

“When you know you have an edge you should bet heavily. Most of that they don't teach that at business school. It's insane. Of course you've got to bet heavily on your best bets.” Charlie Munger

“The number of securities that should be owned to reduce portfolio risk is not great; as few as ten to fifteen holdings usually suffice.” Seth Klarman

“We still have 15-20 stocks in our clients’ portfolios today, consistent with what we’ve done for more than 40 years.” Bill Stewart

“The more positions you have, the more average you are.” Bruce Berkowitz

"The idea of excessive diversification is madness." Charlie Munger

"You can't make money with a diversified approach." David Tepper

"You can diversify yourself into mediocrity." John Neff

“Don’t buy too many different securities. Better to have only a few investments which can be watched.” Bernard Baruch

"I think diversification and all that stuff they're teaching at business school today is probably the most misguided concept anywhere." Stanley Druckenmiller

“Diversification is always and everywhere a confession of ignorance.” Andy Redleaf

“Diversification covers up ignorance.” Bill Ackman

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.” Warren Buffett

"We believe in diversification for risk reducing, but we don't want to diversify ourselves into ignorance. If we can do three smart things a year and nothing dumb, we will be very successful. If we can do five, that's a home run." David Abrams

"An investor is not likely to obtain superior results by buying a broad cross-section of the market. The more diversification, the more performance is likely to be average, at best. We concentrate our holdings in a few companies that meet our criteria. Good investment ideas - that is, companies that meet our criteria, are difficult to find. When we have found one, we make a large commitment. The five largest holdings at GEICO account for more than 50 percent of the stock portfolio." Lou Simpson

“On average we’ve owned between 17 and 23 stocks over the history of the firm. Most people would say that seems like it’s a risky thing to do. But the fact is that if each individual stock in your portfolio was selected because the underlying business itself was of higher quality, thereby meaning it has lower risk, then the whole portfolio would likely have lower risk. Owning more stocks rather than less is not going to reduce the risk of the portfolio unless the underlying stocks, no matter what the number was, have less risk themselves. But most people really don’t understand that concept.” David Polen

“Thinking like a business owner supports the case for maintaining a concentrated portfolio consisting only of high-conviction ideas since it is more difficult to fully understand and closely monitor a strategy with many companies compared to only focusing on 20 or 25 high-quality businesses.” Polen Capital

"Our primary frontier of risk management isn't wide diversification, but the quality of the individual businesses, their balance sheets and the people who run them." Chuck Akre

“We believe you can get more than adequate diversification from 15 or more stocks. The quality and sustainability of the businesses is far more important for risk management than how many you own. In fact, we believe that after a certain point, owning more companies increases your risk because you have a greater chance of owning an inferior business. That is why the hurdles we set for inclusion in our portfolio are so high.” Dan Davidowitz

"If you find three wonderful businesses in your life, you’ll get very rich. And if you understand them — bad things aren’t going to happen to those three. I mean, that’s the characteristic of it." Warren Buffett

“In our opinion, the massive over-diversification that is commonplace in the industry has more to do with marketing, making the clients feel comfortable, and smoothing of results than it does with investment excellence. At Nomad, we would rather results were more volatile year to year, but maximized our rolling five-year outcome.” Nick Sleep

"One of the things that is very important to understand is that diversification is only a surrogate, and usually a poor surrogate, for knowledge, control and price consciousness." Marty Whitman

“We do not believe that concentrating the portfolio in fewer positions increases risk, as many people may believe. The concept that diversification reduces the chance of loss or reduces risk is certainly promoted by some modern finance theories and by the world of insurance. We have a different view and our historical record supports our view.” David Polen

"Once you attain competency, diversification is undesirable." Gerald Loeb

“I think too much activity and diversification can crimp your returns so I try to discipline myself and keep portfolios tight. Experience has taught me the grass is not always greener on the other side.” Nick Train

"There's no use diversifying into unknown companies just for the sake of diversity." Peter Lynch

“It is also a fact that the more stocks you own the less you know about each of them and I have never found a theory of investment that suggests that the less you know about something, the more likely you are to generate superior returns.” Terry Smith

“You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower.” Lou Simpson

“We strongly believe that the supply of great businesses is severely limited and to engage in broad diversification is dilutive to the implicit purpose of earning above-average longer-term returns.” Frank Martin

“Great ideas in all walks of life are very rare, and that definitely applies to the investing world. You have to seize those great ideas when they come along. You can't dilute those great ideas with lots of other mediocre ideas.” John Huber

"Our investment style has been given a name - focus investing, which implies ten holdings, not one hundred or four hundred." Charlie Munger

“Keeping the portfolio around ten positions reduces complexity and allows me to thoroughly understand each investment, while still maintaining a comfortable level of diversification. Edward Tufte, an inter-disciplinary scholar of information design and political science, has said, “Clutter is a failure of design, not an attribute of information.” I couldn’t agree more.” Ryan Krafft

"It’s not crazy, if you understand the business well, and if the price is sufficiently attractive, to put a very significant percentage of your net worth in. If you don’t understand businesses, then you’re better off diversifying and fairly widely diversifying." Warren Buffett

“Diversification is the most destructive, over-rated concept in our business. Look at George Soros, Carl Icahn, Warren Buffett. What do they have in common? They make huge concentrated investments. You need ruthless discipline. If the reason you invested changes get the hell out and move on.” Stanley Druckenmiller

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasises feeling good about not having your investment results depart very much from average investment results." Charlie Munger

“The appeal of a concentrated portfolio is that it is the only chance an investor has to beat the averages by a noteworthy margin.” Frank Martin

"The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It’s a very conventional madness. And it’s taught in all the business schools. But they’re wrong." Charlie Munger

"Conventional fund management holds dogmatic disdain for highly concentrated positions. Needless to say, we hold a different view." Allan Mecham

“We also have a strong conviction that the portfolio should be comparatively concentrated. We think that this produces better investment results and it certainly makes us more committed shareholders of companies.” James Anderson

"Concentration of capital is a key ingredient needed to be able to provide superior outperformance. But if you concentrate capital, you need some rules of the road because you have to be careful to avoid any significant losing positions.” Alex Roepers

"Berkshire has a substantial shareholder whose father accumulated the original position, and when he died he left a very large estate, practically all of which was in two securities, Berkshire and one other outstanding company. A bank was co-trustee. And the bank trust officer said you’ve got to diversify this. And, you know, it was a very large estate. And the young man who was co-trustee with the bank said, “Well,” he says, “you know, if my father believed the way you do, he might have been a trust officer in a bank instead of — (laughter) — leaving this large estate.” (Applause). And that young man holds the Berkshire to this day. And I suppose the bank is still giving the same advice." Charlie Munger

"[Our] investment strategy is concentrated by its nature. Generally, at any given time, we have 10-18 core investments and 2-6 farm team investments." Jeffrey Ubben

“The desire to spread stock picking risks over a number of different securities must be balanced against the negative impacts of spreading research resources so thin that an intimate understanding of a company or industry is lost. In such cases, diversification can become ‘di-worse-ification.’” Lee Ainslie

“Some people say that concentrating on just a few positions in which you have most confidence and focus is the way to both make money and decrease risk. I agree, but only up to a point. Often a risk manager faces the greatest need to limit position size when the enthusiasm and self-confidence which enable money managers to ‘pull the trigger’ scream to take a larger position.” Paul Singer

“Diversification needs to be sufficiently high that a failure in one part of the portfolio does not lead to the whole edifice collapsing.” Rob Vinall

“A well-diversified portfolio needs just four stocks.” Charlie Munger

"There is a downside to extensive diversification. As the market goes, so goes your portfolio.” Frank Martin

“Charlie Munger considers that a portfolio of four stocks is a well diversified portfolio. He says, you don’t even need a 5th stock. He goes on to say that if you lived in a small town, and if you owned the best apartment building in town, if you owned the highest quality office building in town, if you owned the McDonalds franchise in town, if you owned the Ford dealership. if you owned this collection of assets, even though they're all geographically concentrated, his perspective is that you will do very well. You will not need to do much else beyond that to have an interesting investing career.” Mohnish Pabrai

“The concept of eliminating or reducing risk through diversification is completely misunderstood. The quality is much more important than the number of stocks, and how we do it in our portfolio is exactly that way: from a stock-by-stock, company-by-company, individual look at the business, the strategy, the competitive advantages and the unique risks to each individual business and trying to figure out if there is a potential for capital loss if we were to invest in that business.” Daniel Davidowitz

“There is one thing I can assure you. If good performance of the fund is even a minor objective, any portfolio encompassing one hundred stocks is not being operated logically. The addition of the one hundredth stock simply can’t reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on overall portfolio expectations”. Warren Buffett, Partnership letter 1965

“Limiting the portfolios to our 20 most qualified investments allows us to know the companies we own and their managements extremely well while providing ample security-specific diversification.” Bruce Berkowitz

“For individuals, any holding of over twenty different stocks is a sign of financial incompetence” Phil Fisher

“Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others which they know nothing at all. It never seems to occur to them, much less to their advisers, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.” Phil Fisher

“For an individual investor you want to own at least 10 and probably 15 and as many as 20 different securities. Many people would consider that to be a relatively highly concentrated portfolio. In our view you want to own the best 10 or 15 businesses you can find, and if you invest in low leverage/high quality companies, that’s a comfortable degree of diversification.” Bill Ackman

“I decided to run a concentrated portfolio. As Joel Greenblatt pointed out, holding eight stocks eliminates 81% of the risk in owning just one stock, and holding 32 stocks eliminates 96% of the risk. This insight struck me as incredibly important. It is hard to find long ideas that are ones or twos or shorts that are nines or tens, so when we find them, we decided that Greenlight would have a concentrated portfolio with up to 20% of capital in a single long idea (it had better be a one!) and generally would have 30-60% of our five largest longs.” David Einhorn

“Let there be no doubt: If you go the route of broad diversification, rest assured that you will never stand out in a crowd.” Frank Martin

“The strategy we’ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.” Warren Buffett

"Diversification is only a free good if one cannot identify mispriced securities. Once the concept of mispricing is introduced, diversifying away from undervalued securities reduces a portfolio’s expected return. Instead of more diversification always being better, diversification becomes a trade-off: it lowers the risk but at the cost of also lowering expected return. We don’t want to dilute our best ideas any more than is required to be prudent." Bill Nygren

“This worshiping at the altar of diversification, I think is really crazy.” Charlie Munger

“The church of diversification, in whose pews the professional fund management industry sits, proposes many holdings. They do this not because managers have so many insights, but so few! Diversity, in this context, is seen as insurance against any one idea being wrong. Like Darwin, we find ourselves disagreeing with the theocracy. We would propose that if knowledge is a source of value added, and few things can be known for sure, then it logically follows that owning more stocks, does not lower risk but raises it!” Nick Sleep

“In the field of common stocks, a little bit of a great many can never be more than a poor substitute for a few of the outstanding.” Phil Fisher

"There is less risk in owning three easy-to-identify, wonderful businesses than there is in owning 50 well-known, big businesses. And it’s amazing what has been taught, over the years, in finance classes about that. I can assure you that I would rather pick — if I had to bet the next 30 years on the fortunes of my family that would be dependent upon the income from a given group of businesses, I would rather pick three businesses from those we own than own a diversified group of 50." Warren Buffett

“Diversification, too aggressively used as a substitute for knowledge, ultimately undermines diversification itself. A poorly understood portfolio may be far less diversified than it appears to be.” Andy Redleaf

"Structure a concentrated portfolio, yet a diverse portfolio." Ed Wachenheim

"I seek to construct a portfolio that is both highly concentrated, yet also diverse in terms of industries, types of value, catalysts, and risk." Whitney Tilson

“To minimize risk and attain diversity, we set a limit on the maximum percentage of the portfolio any stock or industry can represent.“ Ed Wachenhein

"Market-beating managers express their insights in concentrated portfolios that differ dramatically from the character of the broad market." David Swenson

"We also keep reasonable diversity across industries in the portfolio." Jeffrey Ubben

"We've got 10 to 15 positions versus 500 positions in the S&P500. Our mostly uncorrelated industries gives us diversification. I look at that very carefully - how positions correlate with the other positions because you want minimal correlation." Mohnish Pabrai

“We do pay attention to end-market diversification, within our companies and across the portfolio. We obviously won’t have a portfolio of twelve regional-bank stocks. Our goal is to own businesses with uncorrelated enough end markets that we can continue growing the intrinsic value of the portfolio in any kind of market.” Brain Bares

"Empirical studies have shown that up to 95% of random risk—that an investment unexpectedly produces an irreversible, goose-eggreturn—can be mitigated with a portfolio of 12–15 investments. That means an average position would theoretically be between 6.7% and 8.3%. However, these investments must also be prudently diversified in multiple dimensions, including among different industries." Frank Martin

"Owning a diverse portfolio in one market may greatly reduce the risk of being in that market. If that market runs into a pothole, its components could all breakdown at once. Of course, diversification is for us only the starting point for risk reduction. Solid fundamental research, emphasis on catalysts, value discipline, preference for tangible assets, hedge short selling, market put options and other strategies combine to create an overall portfolio safety net for our portfolio that we believe is second to none." Seth Klarman

“Most investors think diversification consists of holding many different things, few understand that diversification is effective only if portfolio holdings can be counted on to respond differently to a given development in the environment.” Howard Marks

"A key component of our investment strategy is sufficient but not excessive diversification. Rather than own a little bit of everything, we have always tended to place our eggs in a few dozen baskets and watch them closely. These bargain-priced opportunities are selected one at a time, bottom up, which provides a margin of safety in case of error, bad luck or disappointing business results. However, we are always conscious of whether these different investments involve essentially the same bet. If each of our holdings turned out to involve similar bets [inflation hedges, interest rate sensitive, single market or asset type etc], we would be exposed to dramatic and sudden reversals in our entire portfolio were investor perceptions of the macro environment to change. Since we are not able to predict the future, we cannot risk such concentrations." Seth Klarman

"We don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification." Charlie Munger

"You will find our challenge to the popular custom of diversification among asset classes, styles, and stocks of so many varieties that they defy description in an essay of this length. We have never understood the truism that most first-generation wealth is created on the strength of one idea or company, and then concludes with the dubious assumption that in order to preserve it, it must be spread among a thousand other companies." Frank Martin

“Sam Walton did not make his money through diversifying his holdings. Nor did Gates, Carnegie, McMurtry, Rockefeller, Slim, Li Ka-shing or Buffett. Great businesses are not built that way. Indeed the portfolios of these men were, more or less, one hundred percent in one company and they did not consider it risky! Suggest that to your average fund manager.” Nick Sleep

“Phil Fisher believed in concentrating in about 10 good investments and was happy with a limited number. That is very much in our playbook. And he believed in knowing a lot about the things he did invest in. And that’s in our playbook, too. And the reason why it’s in our playbook is that to some extent, we learned it from him.” Charlie Munger

“I have four core stocks that are exactly the thing I want. They represent the bulk of my holdings. I have five others in much smaller dollar amounts that are potential candidates to enter this group. But I’m not sure yet.” Phil Fisher

"We believe that exceptional returns are created by concentrated portfolios, as excellent ideas are few and far between. The idea that you should own a little bit of everything is a recipe for mediocrity." Christopher Parvese

"A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don't need to own very many of them". Warren Buffett

"So long as you choose to be invested in stocks, there is one risk for which diversification affords no protection. As you increase diversification, you concurrently and inevitably increase your exposure to market risk - namely, the tendency of your portfolio, like an index fund, to mirror the performance of the market. If you owned an index fund that mimicked the Nasdaq 500 as it fell from 5050 to just over 1000, you might begin to doubt the concept of security of principal (or the principle of security!) that is presumed to be found in the safety of large numbers." Frank Martin

"What works for us is between 10 and 20 (stocks). Owning more than 20 stocks, it's too hard to follow the companies very closely, and a big winner won't move the needle enough. I'm uncomfortable with the risk of owning fewer than 10, because we live in a dynamic world and you do make mistakes. I don't want to make a mistake in a 15% position." Ed Wachenheim

“I think we should have just one portfolio and something like 25 names in it, and be very focused on finding the best opportunities out there; the top 25 ideas and just focus on those. I think the more names, the less likely you are to out-perform the averages.” Francois Rochon

"Most investors should own no more than 10 to 20 stocks." Lou Simpson

"When I started investing my little piddly savings as a lawyer, I tried to figure out how much diversification I would need if I had a 10% advantage every year over stocks generally. I just worked it out. I didn’t have any formula, I just worked it out with my high school algebra. And I realized that if I was going to be there for thirty or forty years, I’d be about 99% sure to do just fine if I never owned more than three stocks and my average holding period is 3 or 4 years. Once I’d done that with my little pencil, I just, I never for a moment believed this balderdash. Why diversification? diversification is a rule for those who don’t know anything. Warren calls them ‘know-nothing investors’. If you’re a ‘know-nothing investor’ of course you’re going to own the average. But if you’re not a know-nothing investor, if you’re actually capable of figuring out something that will work better, you’re just hurting yourselves looking for fifty when three will suffice. Hell one will suffice if you do it right. One. If you have one cinch, what else do you need in life.

And so the whole idea that the ‘know-something’ investor needs a lot of diversification. To think that we’re paying these investors to teach this crap to our young. And people think they should be paid for telling us to diversify. Where it’s right, it’s an idiot decision. And where it’s wrong, you shouldn’t be teaching what’s wrong.” Charlie Munger

"A concentrated portfolio can drastically exceed the performance of the indices but the risks inherent to high concentration is not appropriate for a portfolio that is to be managed prudently. In fact, we consider that a portfolio of about 20 securities is the right balance between having a minimum diversification level to reduce company-specific risk while also having few enough companies to improve the odds of beating the market indices." Francois Rochon

"The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But ninety-eight percent of the investment world doesn't think this way. It's been good for us - and you - that we've done this." Charlie Munger

"A few things have worked out very well [for me]. And the nice thing about the investment business is that you don't need very many. You'll see plenty of times when you get chances to do things that just shout at you. And the thing you have to do is, when that happens, you have to take a big swing. That is no time to be reading a book on the theory of diversification....When you find something where you know the business is within your circle of competence, you understand it, the price is right, the people are right - then you take your thumb out of your mouth and you barrel in." Warren Buffett

"A high level of concentration flies in the face of conventional wisdom which hails the benefits of diversification (typically >50 companies). I think there is plenty to be said for diversification if you are seeking a market like return. However, it is the enemy of the stock picker as it is almost impossible to beat the market with a diversified portfolio." Robert Vinall

"If you students of America go to these elite business schools and law schools and they learn corporate finance the way it’s now taught and investment management the way it’s now taught. And some of these people write articles in the newspaper and other places and they say, ‘Well, the whole secret of investment is diversification.’ That’s the mantra. They’ve got it exactly back-ass-ward. The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor; it’s not for the professional." Charlie Munger

“Diversifying investments stops working just when diversification is needed most – in highly leveraged and tightly intertwined markets that turn down.” Paul Singer

“We do seek portfolio diversification, but the strictness of our investment criteria will inevitably leave us with a concentrated portfolio of 20 – 30 companies. We do not fear the concentration risk which this brings for two reasons. One is that research has shown that you can achieve close to optimal diversity with 20 stocks. But this may not be true in our case, as our investment criteria typically lead to a concentration in certain sectors. We then fall back on our other reason for not fearing concentration risk. As Mr Buffett said ‘Wide diversification is only required when investors do not understand what they are doing.’” Terry Smith

“What is the point of owning your 40th best idea? Let’s say it’s an equally distributed 40 businesses in a portfolio. If you’re lucky enough to have that business double in value, it will add exactly two and half percentage points to your portfolio. Who is smart enough? To find 40 businesses that are that good. Well, I’m certainly not one of them, so I figured, well, what’s a manageable number? And I said, well, 20 sounds like a lot, 15 sounds okay, 10 sounds even better because, you know, I just can’t keep the financial details of 15 businesses in my head with any with any depth… I think that our top three businesses are at least 35% to 40% our assets. And the top 10 are easily 75 or 80% of our assets and there’s a small farm team above and beyond the core holdings.” Peter Keefe

“With our financial strength we can own large blocks of a few securities that we have thought hard about and bought at attractive prices. (Billy Rose described the problem of over- diversification: “If you have a harem of forty women, you never get to know any of them very well.”) Over time our policy of concentration should produce superior results, though these will be tempered by our large size. When this policy produces a really bad year, as it must, at least you will know that our money was committed on the same basis as yours.” Warren Buffett