Irish playwright Oscar Wilde had a genius for epigrams. One of
his more endearing was this:, "Moderation is a fatal thing.
Nothing succeeds like excess."
Clever, to be sure, but hardly a truism. Most of us can
ruminate in short order and advance a list of people undone by
This is certainly true in the investing world, where I've seen
investors undone by excess - excessive trading, excessive
leverage, excessive trend-following. And this might come as
a surprise - by excessive diversification.
To be sure, you want to avoid allocating the family fortune to
one stock. But if the goal is to wealth-build and to beat the
major-market indices, you'll want to avoid allocating the fortune
across a universe of investments.
The fact is, the great investing fortunes are marked by
investment concentration - large allocations to a few select
My favorite value investor, Carl Icahn, lords over a stock
portfolio that rarely exceeds 15 issues. Icahn's strategy is to
assume large concentrated positions in a few underperforming
stocks and agitate for change.
You can't argue against Icahn's long-term success: His
Icahn Enterprises Partners (NYSE: IEP
is up 1025% over the past 15 years. The broad-based S&P
500 Index is up a mere 60%.
Warren Buffett's most productive years were also his most
concentrated. From the mid-1970s through the mid-1980s,
Berkshire Hathaway's (NYSE: BRK.a)
stock portfolio rarely exceeded 10 issues. At the end of one
year, 1986, Berkshire's stock portfolio consisted of only three
stocks - Capital Cities/ABC, GEICO, and The Washington Post
At the end of 1975, a Berkshire share was valued at $41. By
the end of 1987, it was valued at $2,820. That's a 47%
average annual rate of appreciation.
Since then, Berkshire's stock portfolio has ballooned to more
than 40 issues, while its portfolio of wholly owned
companies exceeds 50. Berkshire today is a huge, very diversified
conglomerate. Performance has suffered for it. Over the past 15
years, Berkshire shares are up only 200%
I don't suggest whittling your investment portfolio to three
stocks. But a portfolio of 10 to 12 stocks can go a long way to
improving returns. Surprisingly, such concentration won't
materially increase your risk profile.
An influential 1968 article written for the
Journal of Finance
titled "Diversification and the Reduction of Dispersion: An
Empirical Analysis" revealed that as few as 10 securities can
reduce risk, measured as standard deviation, to a level virtually
identical to that of the market.
Balance is key. You don't want to overweight an individual
security or sector. Pick the most promising investment from a
sector and don't dilute with a bunch of also-rans. At the same
time, buy stocks with opposing interests, which will occur
if you diversify across sectors and avoid overloading one
I'm a fan and practitioner of concentrated portfolio
investing. It's the only way I know to beat the major market
indices over the long haul. What's more, it puts you one up
on institutional money. Good luck finding a mutual fund or ETF
practicing diversified concentrated strategy.
Better yet, good luck finding a diversified mutual fund or ETF
that consistently beats the major market indices. They are
as rare as a Carl Icahn or a Warren Buffett circa 1985.
If you're interested in developing a concentrated portfolio,
we can help. We've developed the
High Yield Wealth
, which is composed of 12 recommendations taken from the High
Yield Wealth portfolio.
These 12 investments were chosen for yield and value. They
were also chosen for their opposing interest. The quick-start
portfolio offers novice and intermediate investors the
opportunity to get started in concentrated-portfolio investing...
as well as the opportunity to beat the major market indices over