Diversification versus concentration or as some call it Diwersification. Our colleague Kyle Mowery has a new e-book on the topic. Below are some great quotes about why concentration is a better strategy for many value investors from some of the famous gurus.
“Diversification for its own sake is not sensible. This is the index fund mentality: if you can’t beat the market, be the market. Advocates of extreme diversification—which I think of as overdiversification—live in fear of company-specific risks; their view is that if no single position is large, losses from unanticipated events cannot be great. My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings. One’s very best ideas are likely to generate higher returns for a given level of risk than one’s hundredth or thousandth best idea.”
– Seth Klarman, Baupost Group
The explosive growth of Henry Singleton's Teledyne
Henry Singleton’s Teledyne is one of the greatest business success stories there is. The conglomerate was born in the early 60s by the acquisition of a single company with less than $1 million in revenue. Over the next 15 years, Henry Singleton acquired around 125 (or 145 or 130 there are several different estimates) other companies Read More
“Wide diversification is only required when investors do not understand what they are doing. Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
– Warren Buffett, Berkshire Hathaway
“As a result of overdiversification, their (active managers) returns get watered down. Diversification covers up ignorance. Active managers haven’t done enough research into any of their companies. If managers have 200 positions, do you think they know what’s going on at any one of those companies at this moment?”
– Bill Ackman, Pershing Square
“The average mutual fund that holds 150 names goes that far out on the spectrum more for business reasons than for performance reasons. This is a profession where managers focus alot on the question: ‘What mistake would it take to get me fired?’ The answer usually centers around underperforming by a certain amount, so they develop a strategy to minimize the probability of that outcome.”
– Bill Nygren, Oakmark Funds
Full e-book here.