What the Masters Would Say
This is one of the most debated questions in investing, and the honest answer depends on your level of knowledge, the time you can dedicate to research, and your emotional tolerance for volatility. There is no single right answer, but there are principles that can guide you.
Warren Buffett suggests that wide diversification is a hedge against ignorance -- the more you know, the fewer stocks you need. This is not an insult to diversification; it is an acknowledgment that concentration requires deep knowledge. Buffett can hold 40% of his portfolio in Apple because he has spent years understanding the business intimately. Most investors do not have that depth of knowledge about any single company.
Joel Greenblatt's research shows that concentrating on your 5 to 8 best ideas typically outperforms holding 50 mediocre ones. The math is intuitive: if you truly have 50 good ideas, you are probably fooling yourself about the quality of most of them. But Greenblatt also warns that concentration requires the emotional ability to endure significant drawdowns without panic-selling.
Philip Fisher's analogy is perfect: stocks are like children -- do not take on more than you can properly look after. Each stock in your portfolio should represent a business you actively monitor and understand. If you own 40 stocks but can only describe the business model of 10 of them, you have 30 positions that are essentially blind bets.
Charlie Munger advocates for what he calls "sit on your ass investing" -- owning a small number of great businesses for a very long time. He believes that the transaction costs, tax friction, and analytical dilution of owning too many stocks make it nearly impossible to outperform.
Benjamin Graham took the opposite view: for defensive investors who cannot commit to deep analysis, broad diversification across at least 20-30 stocks provides adequate protection against the risk of being wrong about any single holding.
Here is a practical guide based on your situation:
Your Action Plan
2. If you are an experienced investor with deep knowledge: 8-12 concentrated positions may serve you better, provided you understand each business thoroughly.
3. Regardless of your approach, ensure no single position exceeds 15-20% of your portfolio. Even the highest-conviction idea can be wrong.
4. Diversify across industries and geographies, not just across ticker symbols. Owning 15 tech stocks is not diversification -- it is sector concentration.
5. Review periodically whether you can explain the investment thesis for every position. If you cannot, that position is too large for your knowledge level.
The Bottom Line
The goal is to own enough to protect against the risk of being wrong about any single company, while maintaining enough concentration for your best ideas to actually move the needle.
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Principles That Apply
"Wide diversification is only required when investors do not understand what they are doing."Read Full Principle →
"Hold 20-30 positions to reduce single-stock risk while maintaining concentration in best ideas."Read Full Principle →
"I don't want a lot of good investments; I want a few outstanding ones. Concentration in your best ideas is key."Read Full Principle →
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