Focusing on Quality

Our preference for owning a focused portfolio stems from the fact that we believe that doing so is one of the most effective ways to reduce risk. We feel that by investing in companies where we have a high level of conviction, we reduce the risks associated with owning a diversified portfolio in companies that we consider less promising.

Our belief is that broad diversification over long periods will inevitably produce average or below average results. In our experience, holding a focused portfolio (i.e. 8-20 stocks) in which we conduct and maintain adequate research is the surest way to reduce risk and perform well. 

If we are able to unearth a business that checks each of our stringent criteria, that can be purchased at a significant discount to our assessment of its intrinsic value, we believe it would be sensible to buy more shares in this company, rather than spreading our capital across lower conviction ideas.

Our belief is that many investing professionals preach broad diversification for two main reasons;

  1. Because money managers lack belief in their own investing philosophy, and are therefore unwilling to invest with conviction.
  2. In an attempt to avoid short term volatility, managers are prepared to give up long term performance to maintain a more steady return.

Mass diversification is a tool used by advisers who are more concerned about divergence from market than actual returns.