Concentrated vs Diversified Portfolios
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Concentrated vs Diversified Portfolios
Concentrated vs Diversified Portfolios
One of the sharpest disagreements in the corpus: how many positions should an investor hold? On one side, practitioners who concentrate — warren-buffett's Berkshire and Pabrai Funds. On the other, the diversification logic of modern portfolio theory as taught in the CFA curriculum. The two camps disagree not about facts but about what the primary risk is.
The concentration camp: know a few things deeply
Berkshire's stated policy since the 1980s is to hold large blocks of a few securities. In the 1984 letter Buffett writes that Berkshire's financial strength means "we can own large blocks of a few securities that we have thought hard about and bought at attractive prices", and quotes Billy Rose's jibe at over-diversification: "If you have a harem of forty women, you never get to know any of them very well."
Concentration, in this view, is the consequence of selectivity — of doing deep work on a handful of ideas rather than spreading thin. Buffett expects the policy to produce superior results over time, tempered by Berkshire's large size.
Mohnish Pabrai runs the same philosophy to its extreme. His 2023 letter discloses that the top four positions in each fund hover around 70% of assets; by 2026 the top three "bets" reached 73–85% of the three funds, with Pabrai acknowledging the funds "get very concentrated" and that the resulting swings are "par for the course."
Pabrai's defense is volatility-for-value: concentration concentrates both the downside swings and the upside from being right on a few large ideas, and he accepts the former as the price of the latter.
The diversification camp: reduce risk, don't outsmart the market
The CFA curriculum treats diversification as the mechanism by which portfolio risk falls below the sum of its parts. Combining assets whose returns are less than perfectly correlated yields a higher return at lower risk — "the power of diversification" — and combining US stocks with world-excluding-US stocks lowers measured risk below either alone.
This logic is indifferent to the investor's skill: it assumes the risk worth bearing is systematic risk, for which investors are compensated, while nonsystematic (diversifiable) risk earns no compensation. Diversification is what removes the uncompensated risk.
Where Buffett actually bridges the two
Buffett does not reject diversification outright — he reserves it for those who cannot value businesses. His 1993 letter says a "know-nothing" investor who periodically buys an index fund can outperform most professionals; his 2013 letter says the know-nothing who "both diversifies and keeps his costs minimal is virtually certain to get satisfactory results."
So the real divide is not whether concentration is always right but a fork: if you can identify superior businesses and prices, concentrate; if you cannot, diversify cheaply. Concentration is a bet on skill; diversification is an admission of its absence. This maps directly onto efficient-market-hypothesis and risk-vs-uncertainty — the concentrator treats risk as permanent loss on a few known businesses, while the diversifier treats risk as the volatility that spreading positions away. Both are defensible; they simply price different risks.
See also
Sources
berkshire-hathaway/Letters-Markdown/1984 - Letter to Shareholders.mdinvestor-letters/PabraiFunds/Letters-Markdown/2023-01 - Letter to Partners.mdinvestor-letters/PabraiFunds/Letters-Markdown/2026-07 - Letter to Partners.mdtextbooks/markdown/investment-textbooks-pdfs__CFA LV1 2025 - Volume 09 - Portfolio Management.mdberkshire-hathaway/Letters-Markdown/1993 - Letter to Shareholders.mdberkshire-hathaway/Letters-Markdown/2013 - Letter to Shareholders.md