Why Do Some of the World’s Best Investors Bet Big on a Few Stocks?

In this lesson, we explore the tension between diversification and concentration—and how to manage risk if you choose to focus your portfolio.

Diversification vs. Concentration

The Traditional View

Most investors are taught to spread their money across many stocks or sectors. That way, if one fails, the others can soften the blow.

The Concentrated Approach

Warren Buffett famously called diversification “protection against ignorance.” In his view, if you’ve done your homework and truly understand a handful of great businesses, spreading yourself thin might actually limit your upside.

The Real-World Challenge: Time and Focus

Monitoring Many Stocks Is Hard

Tracking dozens of companies takes time, tools, and a clear system. Most individual investors can’t stay on top of that many moving parts.

O’Neill’s Take

In How to Make Money in Stocks, William J. O’Neill emphasizes that just one or two big winners can drive the bulk of your returns—so why dilute those gains with a bunch of mediocre positions?

Where Index Funds Fit In

Instant Diversification

Index funds are simple, low-cost, and provide exposure to hundreds of stocks in one shot. For many investors, that’s the best place to start.

But You’ll Match the Market, Not Beat It

By definition, index funds aim for average returns. If your goal is to outperform, you’ll need to go beyond broad exposure and focus on your highest-conviction ideas.

Managing Risk When You Focus

The Myth of Total Protection

Even a “diversified” portfolio is vulnerable during a market-wide selloff. Just owning more stocks doesn’t guarantee safety.

Smarter Risk Controls

Sector Balance

Choose businesses in industries that don’t all rise or fall together. For example, pair a high-growth tech stock with a steady consumer staple.

Buy in Steps

Ease into positions. Start small, and add more only if the price drops and your thesis still holds. This helps manage risk and emotion.

What About Financial Advisors?

The Fiduciary Filter

Most fiduciary advisors are trained (and often required) to recommend diversified portfolios. Don’t expect them to champion concentrated strategies—especially if they’re working off model portfolios.

Going Solo

If you’re serious about a concentrated approach, you’ll likely have to do it yourself. That means committing to research, analysis, and accountability.

Is Concentration Right for You?

Be Honest About Your Commitment

This isn’t “set it and forget it.” Concentrated investors read quarterly reports, listen to earnings calls, and follow sector trends closely.

Understand the Tradeoff

Focused portfolios can produce outsized gains—but also sharper drawdowns. It’s not for everyone. But if you do it well, it can be a game changer.

Conclusion: High Risk, High Reward—If You’re Ready

A concentrated portfolio can outperform—but only if backed by knowledge, discipline, and vigilance.

If you know what you own, why you own it, and you’re willing to monitor it like a hawk, concentration can be your edge.