Concentration Over Diversification

Most returns come from just a handful of investments. We focus capital on a few extraordinary businesses.

The Diversification Myth

Modern portfolio theory promotes broad diversification as the primary tool for managing risk. The result is portfolios containing dozens or hundreds of positions, most of which are mediocre. The exceptional ideas are diluted by the average ones, and performance converges toward the index — minus fees.

We take the opposite view. If you have identified a truly exceptional business trading at a fair price, the rational action is to allocate significant capital to it. Spreading that capital across twenty other ideas because of a theoretical diversification benefit makes no sense if those other twenty ideas are inferior.

The Mathematics of Concentration

Research consistently shows that the majority of stock market returns come from a very small percentage of stocks. If you hold the index, you capture both the exceptional performers and the significant number of businesses that destroy capital. If you hold only the exceptional performers, your results will be substantially better.

The challenge is identifying those exceptional performers in advance. We believe this is possible for investors who are willing to do deep, rigorous analysis and who have the patience to wait for the right prices.

Concentration Requires Conviction

Running a concentrated portfolio requires more confidence in each position than a diversified strategy demands. We are comfortable with this. Our research process is designed to build genuine conviction in a small number of businesses before we invest. We do not invest to create the appearance of activity or to reduce tracking error against a benchmark.

We own what we believe in, in meaningful size.