Concentrated investing defies orthodoxy by placing bold, calculated wagers on a handful of securities. This high-conviction approach offers the potential for outsized returns—but demands discipline, research, and unwavering confidence.

Understanding Concentrated Investing

At its core, concentrated investing involves holding a small number of stocks—often between 10 and 50, sometimes fewer—that account for a large share of portfolio exposure. Morgan Stanley defines a concentrated position as when five or fewer stocks contribute more than 30% to portfolio-level risk. Fidelity echoes this, noting that a handful of names often represent more than 10–20% of total portfolio value. Parnassus Capital typically builds portfolios of 15 to 50 holdings, emphasizing quality over quantity.

This strategy diverges from broad diversification by focusing resources on the best ideas of an investor’s research process. Rather than spreading capital thinly, managers commit to fewer positions where they believe they hold an informational advantage.

Lessons from Investing Legends

History offers compelling proof points for the power of concentration. In 1964, Warren Buffett deployed 40% of his partnership’s assets into American Express after its stock crashed. The position quintupled, vaulting Buffett’s partnership to new heights. Earlier, he invested 35% in Sanborn Map Company. As Buffett famously said, "If you are a professional and have confidence, then I would advocate lots of concentration."

Charlie Munger, Buffett’s longtime partner, has espoused portfolios with no more than three stocks, accepting short-term volatility for potential long-term gains. Joe Rosenfield placed one-third of an endowment into the then-unknown Sequoia Fund, while Stanley Druckenmiller and George Soros engineered a concentrated bet against the British pound that became legendary.

More recently, Jack Dorsey disclosed that 50% of his personal portfolio resides in a single, high-conviction value stock. These stories underscore that when professionals hold deep conviction, concentrated bets can yield extraordinary results.

What the Data Tells Us

Empirical research supports the premise that concentration can enhance performance. The CFA Institute analyzed portfolios from 1999 to 2014 and found that a 10-stock portfolio had a 35% chance of outperforming the market by at least 1% per year. By contrast, a 250-stock portfolio had only a 0.2% chance of the same achievement, and never outperformed by 2% or more. The smaller, leaner portfolio boasted a 22% chance of beating benchmarks by 2% annually.

These findings highlight the phenomenon of diminishing returns after 10–30 stocks. Benjamin Graham, Buffett’s mentor, also suggested that beyond 30 names, further diversification yields minimal risk reduction.

Core Characteristics of Concentrated Strategies

Concentrated investors share several defining traits. High conviction is paramount—managers back only their strongest ideas, underpinned by a meticulous, deep fundamental research process. Fewer holdings enable an unparalleled informational edge, as analysts can dive deeper into each business model.

Patience is essential: a multi-year long-term horizon allows positions to mature and market sentiment to catch up with intrinsic value. Emotional discipline and the willingness to hold through rough patches separate successful practitioners from those who abandon their best ideas under pressure.

Only investors with permanent sources of capital—such as endowments, family offices, and insurance floats—can weather redemptions and liquidity demands. Open-ended mutual funds often face outflows that force sales at inopportune moments.

Managing Risk and Position Sizing

Firm position sizing is central to controlling downside. Many investors apply variations of the Kelly Criterion, which calculates optimal bet size based on expected value. However, markets lack fixed probabilities, so strict Kelly can lead to overbetting. A common practice is to use a fraction of Kelly’s recommendation—often half—to temper risk.

Beyond sizing, industry veterans employ several risk reduction techniques:

• Maintaining cash buffers or non-correlated assets as shock absorbers.
• Spreading holdings across distinct sectors to avoid concentration risk.
• Using hedges or derivatives to guard against market downturns.
• Staggering entry points to average into positions over time.

Is Concentration Right for You?

Concentrated investing is not a one-size-fits-all solution. It demands emotional discipline and the ability to sleep soundly when markets swing wildly. Know-nothing investors, as Charlie Munger calls them, risk ruin if they lack an edge or abandon positions at the first sign of pain.

However, smaller, agile portfolios reap an agility advantage in markets, accessing small, illiquid opportunities that larger funds cannot. For those with significant expertise and conviction, concentration can unlock value hidden from the crowd.

Diversification Solutions for Large Positions

When a single holding grows beyond comfort, several strategies exist to mitigate risk without sacrificing conviction:

• Gradual position trimming to rebalance and lock in gains.
• Gifting shares to family or charity for tax-efficient exposure reduction.
• Contributing shares to exchange funds in return for diversified units.
• Implementing long/short or direct indexing strategies to spread risk.

BlackRock’s LS130 and LS200 long/short solutions illustrate how managers can diversify without liquidating core bets, optimizing both return potential and tax efficiency.

Final Thoughts

Concentrated bets demand courage, conviction, and craftsmanship. When executed properly, this strategy can deliver outsized returns that diversification alone cannot match. But the path is narrow: only investors with deep knowledge, extended multi-year long-term horizon, and unwavering discipline should tread it.

Before embracing concentration, assess your capacity for risk, your time horizon, and your ability to maintain conviction during volatility. Let the legends—Buffett, Munger, Soros, and others—inspire you, but remember that high conviction is only half the battle; risk management and emotional resilience complete the formula for success.

By striking the balance between boldness and prudence, concentrated investing can transform a portfolio into a vehicle for extraordinary wealth creation, proving that sometimes, when high conviction pays off, less truly can be more.