Concentrating on your Best Ideas

Too much diversification, we believe, is not necessarily helpful and actually could be detrimental.


Warren Buffett rejects the idea that wide diversification is helpful to investors. On the contrary, he thinks the addition of an investor's 21st favorite holding is more likely to lower returns and increase risk than simply adding money to the investor's top choices.


In his 1993 Letter to Shareholders Buffett says, “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.”


According to a study published in the American Association of Individual Investors Journal (2004), adding more than 25 stocks to a portfolio produces limited benefits. In addition, an investor with only 25 stocks in his portfolio is more likely to know those stocks very well, because he can spend more research time on each stock. Obviously each stock added to the portfolio reduces the amount of time that can be devoted to each name.


Like Buffett, we have found that limiting the number of companies we invest in allows us to drill deeper into the factors that drive those stocks, therefore developing a higher level of confidence in our selections.


“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” -- Warren Buffett

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Dave Crouch and not necessarily of Raymond James. Raymond James is not affiliated with and does not endorse the opinions or services of Warren Buffett or Charlie Munger. Diversification and asset allocation do not ensure a profit or protect against a loss. This is not a solicitation to buy or sell Berkshire Hathaway stock or any other security. Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results.



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