Market Whims

The biggest benefit of Buffett-style concentration may be that it tends to untie your portfolio’s performance from the broader market. For this reason a concentrated investor arguably has more control over his investment results. Conversely, a well-diversified investor ties much of his investment performance to the broader market. The more diversified you are, the more likely your portfolio matches market swings and market returns.

Concentration increases the importance and impact of the individual companies you’ve selected and decreases the importance and impact of the broader market. With concentration the mental focus shifts from relative performance, and the goal of beating the market, to absolute performance, and the goal of maximizing your returns regardless of how the broader market performs.

If the broader market appears overvalued, then a well-diversified portfolio that roughly matches broad market swings may be more risky than a concentrated portfolio that’s more likely to move independently.

For these reasons, your long term investment prospects are arguably more predictable when you invest in a small group of undervalued companies you know and understand well versus investing in a big diversified group you know less well. The small group is more likely to move independently of the unpredictable broader market, while the big group is more likely to mirror market volatility.

The author is not an investment advisor or CFA and readers should consult an investment advisor before buying or selling any publicly traded stock. The views expressed in this article are the author's personal opinions and should not be construed as investment advice.