Concentrated Portfolio

In order to have consistent success in outperforming the market, you must have a concentrated portfolio. If you are a good stock picker then it makes sense to have high positions in your highest conviction stock picks. Having a diversified portfolio where you have stocks in every industry just makes not sense to me. If you are going to go that route or have someone run your money that goes that route you would be much better off simply buying an index like the S&P 500.

Bruce Berkowitz, manager of a very successful hedge fund, puts it best when he says something to the extent of, "why put money in your 35th or 36th best idea when you could put money in your first and second best ideas." I would argue that if you are an outstanding stock picker that having a concentrated portfolio could actually lower your risk. If you buy stocks that are so drastically undervalued, when the market goes down, chances are those stocks will outperform. It is important to note that you have to still own a fair amount of stocks, say five or six, in order for that to work. If you run too concentrated a portfolio then you could really get caught if one of your few stocks faces an unforeseen or unlikely event.

If you are looking to beat the market year after year then make sure that you have a concentrated portfolio made up of stocks that are so undervalued that you have a large margin of safety. My next post I will talk about how to find stocks that are undervalued.