In modern investing, diversification has become dogma. It is rarely questioned, universally recommended, and deeply embedded in the infrastructure of financial education. But like many ideas that begin as wisdom and end as cliché, diversification, as it is now practiced, reflects a loss of clarity about what investing is meant to be.
Warren Buffett famously said that “diversification is protection against ignorance. It makes little sense if you know what you are doing.” For decades, this statement has been brushed aside as the musings of a genius with an unusually high risk tolerance. In truth, it was a quiet indictment of the entire financial industry.
Diversification was once a prudent guardrail. It is now a crutch. In a world increasingly allergic to judgment, we have replaced depth with breadth and conviction with convenience. Why learn to understand a business deeply when you can simply own all of them at once?
I have spent the past decade managing a concentrated investment partnership built on the structure Buffett pioneered in the 1950s. It is a model that prizes ownership over speculation and insight over noise. Our portfolio is small by design. We invest only in businesses we understand well, businesses that generate real cash flows, led by competent stewards, and purchased with discipline.
This is not an act of bravado. It is an act of respect for capital, for clients, and for the craft of investing itself. And it stands in contrast to the industrialized portfolios of our time: over-diversified, over-optimized, and often underwhelming. Sizing matters as much as selection. The Kelly criterion formalizes this: when you have a positive edge, and because these opportunities are rare, you must bet big. Because inputs are uncertain and drawdowns matter, disciplined investors use fractional Kelly (e.g., half‑Kelly) to reduce estimation risk and volatility. The spirit aligns with concentration: back your best‑understood businesses responsibly.
The rise of index funds and quantitative allocation models has led many to believe that owning a slice of everything is the best we can do. This may offer statistical comfort, but it quietly removes the moral and intellectual dimensions of investing. At its best, investing is not an algorithm. It is a judgment. It is the act of placing capital, a scarce and powerful resource, in the care of those who can grow it wisely.
Diversification, in its modern form, abdicates this responsibility. It protects the investor not from risk, but from responsibility. It says, “You don’t need to understand. You just need to own the market.” Spreading capital across your 25th or 40th idea frequently dilutes the portfolio’s weighted expected return. Unless those added names bring genuine, independent alpha, the extra breadth mainly reduces tracking error, not the risk of permanent loss. That tradeoff can leave investors with benchmark comfort but mediocre compounding.
But real risk is not volatility. Real risk is the permanent loss of capital. And the best way to avoid that is not to own everything. It is to understand what you own. History shows that in market stress, cross‑sectional correlations rise, compressing the diversification benefit just when investors most hope for it. Diversification still dampens idiosyncratic shocks, but it is far less effective against systemic shocks. That is precisely when business quality, balance‑sheet strength, and cash‑flow durability matter more than the number of line items you hold.
The culture of investing reflects the culture of the broader world. And in both, we see a flight from accountability and a preference for systems over judgment. The concentrated investor must think. He must decide. He must know. And for this reason, he is out of step with the spirit of our time.
But perhaps that is why this model endures. The concentrated, value-oriented approach continues to outperform over long periods, precisely because it demands qualities that cannot be mass produced: discipline, patience, and thought.
The irony is that the more we have diversified our portfolios, the less we have diversified our thinking. Everyone owns the same indices. Everyone hugs the same benchmarks. And everyone wonders why their results look the same.
We do not need more diversification. We need more discernment.
Buffett was right. Not just in his returns, but in his reasoning. And for those willing to step outside the noise, to study great businesses, and to act with conviction, the path is still there.
