“Much diversification is really diworsification.” – Lawrence A. Cunningham
Investing isn’t about owning everything. There’s an old saying in investing: “Concentration makes you rich; diversification keeps you rich.” I’ve found the first half to be far more important, especially if you want to outperform the market.
In Atomic Habits, James Clear shares a story that stuck with me. Jerry Uelsmann, a photography professor, split his class into two groups: one would be graded solely on the quantity of photos they submitted, and the other would be graded on the quality of a single, perfect image.
The results were clear. The quantity group outperformed the quality group by a wide margin. Why? Because through repetition, they learnt faster. They refined their craft. They got better through doing, not just thinking.
This is exactly how successful investing works. We sift through thousands of companies, but in the end, we only invest in the exceptional few that truly stand out.
To many, investing in just a few companies feels risky. But in my experience, it’s far riskier to spread your capital across businesses you don’t deeply understand.
The data backs this up. In Hendrik Bessembinder’s study, “Do Stocks Outperform Treasury Bills?”, it turns out, a very small portion, just 4%, of U.S. stocks were responsible for creating all the stock market wealth from 1926 to 2016.
Warren Buffett’s portfolio tells a similar story:
- His top 10 holdings make up 88% of Berkshire Hathaway’s portfolio.
- The top 5 alone account for 71%.
- Apple—just one company—makes up 26%.
That’s not broad diversification. That’s laser-sharp conviction.
Friedrich Nietzsche described three stages of human maturity: first, we’re like a camel, burdened by society’s expectations. Then we become a lion, pushing back against conventional thinking. Finally, we become child-free, creative, and confident in our own path.
In investing, most people stay in camel mode. They cling to diversification dogma because that’s what they’ve always been told is safe.
But to truly grow—to become independent and effective—you have to go through the lion stage. You have to challenge the rules and think for yourself.
“The strategy we’ve adopted precludes our following standard diversification dogma… We believe that a policy of portfolio concentration may well decrease risk if it raises… the intensity with which an investor thinks about a business.” —Warren Buffett
In other words, the more you know about what you own, the less risky it becomes.
Over-diversification may feel safe, but in the long run, it often leads to average returns and diluted conviction.
In my experience, the best results come from finding a few extraordinary businesses, understanding them inside and out and building your portfolio around them.
It’s not about avoiding risk. It’s about understanding where the real rewards come from and having the courage to act accordingly.
Awet Ghirmay, Head of Investment Research
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
