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Concentrated Investing: Strategies of the World's Greatest Concentrated Value Investors

by Allen C. Benello, Michael van Biema, and Tobias E. Carlisle (2016)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Concentrated Investing: Strategies of the World's Greatest Concentrated Value Investors

By Allen C. Benello, Michael van Biema, and Tobias E. Carlisle

Quick Summary

A study of the world's most successful concentrated investors -- those who hold portfolios of 10 or fewer positions -- including Lou Simpson, Kristian Siem, Warren Buffett, John Maynard Keynes, Charlie Munger, and Glenn Greenberg. The authors demonstrate through case studies and academic research that concentrated portfolios, when managed by skilled investors with deep knowledge and conviction, consistently outperform broadly diversified approaches.

Executive Summary

"Concentrated Investing" by Benello, van Biema, and Carlisle challenges the conventional wisdom that diversification is always beneficial. Through detailed case studies of six legendary investors who practiced extreme concentration -- holding as few as 5-10 positions at a time -- the book demonstrates that skilled investors achieve their best returns precisely when they concentrate capital in their highest-conviction ideas. Lou Simpson ran GEICO's investment portfolio with fewer than 10 stocks and outperformed the S&P 500 by approximately 6.8% annually over two decades. Keynes, after initial failures with top-down macro trading, switched to concentrated value investing and dramatically improved his returns. Munger's concentrated partnership outperformed the Dow by a wide margin. The book combines these biographical/investment case studies with academic research on the relationship between portfolio concentration and performance, concluding that concentration amplifies both skill and lack of skill -- it helps the talented and hurts the mediocre.

Core Thesis

The conventional emphasis on diversification, while appropriate for average investors and indexers, is suboptimal for skilled stock-pickers. The greatest investors in history achieved their extraordinary returns precisely by concentrating their capital in a small number of deeply researched, high-conviction positions. Concentration forces deeper research, creates accountability, and allows truly superior ideas to drive portfolio returns rather than being diluted by mediocre additions.

Key Concepts and Frameworks

  1. Concentration as a Skill Amplifier -- Concentration magnifies both skill and lack thereof. For investors with genuine analytical ability, concentration produces returns far above what diversified approaches allow. For investors without skill, it accelerates losses.
  2. The Kelly Criterion -- A mathematical framework for optimal position sizing that recommends betting proportionally to your edge. The Kelly formula naturally produces concentrated portfolios when the investor has genuine insight.
  3. Deep Value Investing -- Several of the profiled investors (Simpson, Buffett, Greenberg) practiced deep value approaches, buying businesses at substantial discounts to intrinsic value. Concentration requires a margin of safety because each position carries more portfolio risk.
  4. Keynes's Evolution -- Keynes's investment career illustrates the journey from over-diversified, macro-driven trading to concentrated value investing. His performance improved dramatically when he adopted concentration.
  5. GEICO's Simpson Model -- Simpson ran one of the most successful institutional portfolios in history with a simple formula: buy high-quality businesses with strong returns on equity, run by able management, at reasonable prices, and hold them for the long term in a concentrated portfolio.
  6. The Illusion of Diversification -- Beyond a certain point (approximately 15-20 securities), additional diversification adds minimal risk reduction while significantly diluting the impact of best ideas.

Practical Applications for Traders

  1. If you have genuine analytical skill and do deep fundamental research, consider concentrating your portfolio in your 5-10 highest-conviction ideas rather than diversifying broadly.
  2. Use the Kelly Criterion or a fractional Kelly approach to size positions according to your conviction level and edge.
  3. Concentration demands a higher standard of research -- you must understand each holding deeply enough to maintain conviction through drawdowns.
  4. Ensure adequate margin of safety on each position, as concentration provides no portfolio-level protection against individual position errors.
  5. Be honest about your skill level -- concentration only works for investors with demonstrated stock-picking ability.

Critical Assessment

Strengths

  • Compelling case studies of proven investors with long track records
  • Combines practitioner wisdom with academic research on concentration and performance
  • The Kelly Criterion discussion provides a mathematical foundation for concentration
  • Challenges a deeply entrenched orthodoxy (diversification) with evidence and logic

Limitations

  • Survivorship bias -- the book profiles only successful concentrated investors, not the many who failed
  • The sample size of profiled investors is small, making broad generalizations risky
  • Does not adequately address the psychological difficulty of maintaining conviction during drawdowns in concentrated positions
  • The academic evidence on concentration is more nuanced than the book suggests

Historical Significance

This book contributes to an important counter-narrative in investment literature, providing rigorous support for the concentration approach practiced by the Buffett/Munger school. It fills a gap in the literature by profiling less-known concentrated investors like Simpson, Siem, and Greenberg alongside the more famous names.

Key Quotes

  • "Diversification is protection against ignorance. It makes little sense if you know what you are doing." (Warren Buffett, quoted in the text)

Conclusion

"Concentrated Investing" makes a compelling case that skilled investors are better served by concentration than diversification. The case studies of Simpson, Keynes, Munger, and others demonstrate that extraordinary long-term returns have historically been achieved through deep research and concentrated positions rather than broad diversification. The critical caveat -- that concentration amplifies both skill and lack of skill -- is well-stated and should give pause to investors considering this approach without a proven track record. The book's greatest contribution is providing detailed, data-supported profiles of concentrated investors beyond the widely known Buffett/Munger example.