Comparing a Concentrated vs Diversified Portfolio

Portfolio Management
July 16, 2023

Should you have a Concentrated or Diversified Portfolio

The saying goes something like “Many people get rich by holding a concentrated portfolio but stay rich by holding a diversified one”.

Warren Buffet advises holding a concentrated portfolio of your best ideas vs one with your 50 best ideas. This strategy sounds reasonable if you’re trying to get rich, but we don’t think it’s reasonable if you’re already rich. Buffet has almost all his net worth in Berkshire. In his case, the concentration can be justified for a few reasons.

First, Berkshire owns and operates many different businesses. It also holds a large portfolio of publicly traded stocks so while he preaches concentration, his businesses are very diversified.

Second, Berkshire has a very large position in short term treasuries. If all the businesses that Berkshire owns outright and all the publicly traded companies he’s invested in went to zero, his share of the US Treasury position would be worth $30-$40 Billion. We’re certain Warren would do just fine with $30 Billion.

Third, and in our opinion, most importantly, Buffet runs the show. He advocates buying companies a moron can run, because there’s a reasonable chance, if you own the shares long enough, that’s what will happen. In his case, he’s one of the smartest investors in the business. There’s no fear (while he’s competent) that he will be replaced by someone who can drive the many businesses Berkshire owns into the ground. This is not the case with most other publicly traded companies.

If you’re rich, there’s very little upside in trying to beat the market and potentially a lot of downside. We suggest holding a very well diversified portfolio that includes stocks that trade in currencies outside of the Dollar. In our opinion, that type of diversification might have a minor impact on your portfolio’s long term performance, but it adds an additional layer of safety to your portfolio.

We look at it from this perspective, if you’re currently a rich, double-digit millionaire, are you willing to risk becoming a single digit millionaire in the quest of trying to become a triple-digit millionaire?

We know of an investor whose net worth is close to $100M and who is frequently looking to move up the risk ladder to gain a few extra percent of yield. He’s not unique. Some investors' views are “stick with the strategy that got you where you are”. This is a nice sound bite, but we don’t think it’s the best practice. When we’re evaluating an investment strategy, the first consideration is Risk of Ruin (losing our capital). Looking at the return only comes after we’re comfortable with the first.