Concentrating on Your Best Ideas

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Concentrating on Your Best Ideas

Warren Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values. Therefore, his investment portfolio has often been concentrated in relatively few companies. This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors. On the contrary, he thinks the addition of an investor’s 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor’s top choices.