By Investment Master Class. Originally published at ValueWalk.
“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
“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
“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
“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
“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
“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
“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
“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
“Once you attain competency, diversification is undesirable” Gerald Loeb
“There’s no use diversifying into unknown companies just for the sake of diversity” Peter Lynch
“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
“Our investment style has been given a name – focus investing, which implies ten holdings, not one hundred or four hundred” Charlie Munger
“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
“Conventional fund management holds dogmatic disdain for highly concentrated positions. Needless to say, we hold a different view” Allan Mecham
“[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 Ainslee
“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
“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
“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
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