The Power of
Concentration

The average manager continues to underperform the index. Why? The institutional imperative incentivizes them to fear standing out by underperforming. So they over-diversify, and trade often, diluting good ideas with bad ones. They closet index.

You can't beat the market index by holding the market index. Once you subtract their fees, trading costs, and short-term taxes, they underperform—by definition.

So you must hold a differentiated portfolio to beat the market. You do this by concentrating your investments.

But isn't that risky? Not if you are disciplined, patient, and understand the limits of your and the market's knowledge. You only invest in the absolute best probabilistic bets. You wait for Mr. Market to throw you a fat pitch—and you swing hard.

A concentrated portfolio of the world's best companies, bought at below average prices is less risky and has higher returns, than an overly diversified conglomeration of average companies bought at average prices.

If you can be disciplined, patient, and humble—if you can keep your head while all those around you are losing theirs—you can capitalize of the vicissitudes of the market, and outperform with less risk.

We win by inverting the standard paradigm of the market.