Portfolio Concentration

Summary

The investment strategy, practiced by Berkshire Hathaway, of holding large, concentrated positions in a very small number of "wonderful businesses" rather than broadly diversifying across hundreds of mediocre businesses.

Origin & Context

While Buffett practiced concentration throughout the Partnership years, he explicitly named and defended the strategy in the 1993 Letter, contrasting the "know-something investor" (who should concentrate) with the "know-nothing investor" (who should broadly diversify via index funds).

Partnership-Era Roots (1959-1964)

• 1959 Letter: The earliest documented concentration bet — Sanborn Map Co. grew to 35% of total partnership assets, an extraordinary position size by any standard. Buffett was already departing from Graham's diversification orthodoxy when the odds were overwhelmingly in his favor.
• 1961 Letter: Dempster Mill Manufacturing Company represented another large concentrated control position, demonstrating that concentration applied not just to passive "Generals" but also to active "Controls."
• 1964 Letter: The partnership held only a handful of large positions, with Buffett noting that his best ideas deserved the most capital — a principle he would formalize 30 years later.

Evolutionary History

1993

• The "One Good Idea" Rule: Buffett notes that as capital grows, the universe of actionable ideas shrinks. Therefore, the strategy shifted from trying to find hundreds of smart ideas to settling for "one good idea a year."
• Concentration Decreases Risk: Counter to academic dogma, Buffett argues that concentration decreases risk because it raises the intensity with which an investor must study the business and the required comfort level before buying.
• The "Know-Something" vs "Know-Nothing" Investor:
  • Know-Nothing: Investors who do not understand specific business economics should broadly diversify (e.g., via index funds) and buy slowly over time.
  • Know-Something: Investors capable of understanding business economics and finding five to ten sensibly-priced, wonderful companies should intensely concentrate. It makes no sense to put money into your 20th favorite idea rather than your top choice.

Primary Source Quotes

"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." — Warren Buffett, 1993 Letter

"If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices... In the words of the prophet Mae West: 'Too much of a good thing can be wonderful.'" — Warren Buffett, 1993 Letter

🔗 Connections

• Concepts: Volatility vs Risk, Margin of Safety, Circle of Competence
• Sources: 1959 Letter, 1961 Letter, 1964 Letter, 1993 Letter