Concentration Explains Much of Buffett’s Investment Success

Last week I gave a guest lecture at the University of Missouri-Columbia Business School for a course entitled “Managerial Influences on Portfolio Selection.” The course focuses on studying Warren Buffett and his investment strategies. Proponents of “efficient market theory” (a view with which I strongly disagree) attribute success stories like Buffett’s to sheer luck. This is a preposterous contention, but it is important to understand why Buffett has done so well for such a long time.

All of the reasons are too great in number to mention here, but an important aspect of Buffett’s track record is the conviction by which he relies. Since he could only find a certain few great investment ideas at any given time, Buffett’s portfolios never looked anything like an index fund or any type of widely diversified portfolio.

In fact, as of the beginning of this year Berkshire’s top five holdings represented more than 70 percent of its equity investment portfolio (see chart above). This level of concentration has been a staple of Buffett’s investment strategy since he started his hedge fund in the 1950’s and even with Berkshire Hathaway decades later. The lesson to be learned is quite simple; Buffett attained such a brilliant track record by not only being right, but also by making sizable bets when he had extreme faith in his investment ideas.

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5 Thoughts on “Concentration Explains Much of Buffett’s Investment Success

  1. Krish on July 13, 2005 at 6:43 PM said:

    Great post. How many holdings do you have at Peridot Capital?

    Thanks.

  2. Chad Brand on July 13, 2005 at 7:06 PM said:

    While I don’t have an exact statistic, I’d say the average Peridot portfolio has between 20 and 25 holdings. Accounts just starting up might have less, and anything above 30 is rare.

  3. Jack Miller on July 14, 2005 at 5:50 PM said:

    I happen to believe a major turn is under way for the legacy airlines. CAL for example has cut labor costs by 500 million per year and is flying more full planes than ever. I have built a very over weight position in airlines. My fealing is the risk is less than when I had most of my assets tied up in a small business. What do you think, total folly or profitable fun?

  4. Chad Brand on July 14, 2005 at 9:38 PM said:

    I hope for your sake that oil prices come down significantly from here. Without that, the legacy airlines are in serious trouble.

    I think Delta files bankruptcy next year. Continental, while is better shape with its overall cost structure, has no fuel hedges in place. They need oil to come down big time.

    The airline thesis is all predicated on your view of oil. I am not one who thinks oil is coming back down to $30 or $40 per barrel, so I’m taking the opposite end of the trade (FD: currently betting against Delta only).

  5. Aletheia on August 31, 2008 at 7:58 AM said:

    right now i’m making a thesis about the relevancies of W.Buffett investment methodology in emerging market (Indonesian equity market), because Mr. Buffett never write a book about his own remarkable success i use the buffet Way and Warren Buffett Portfolio written by Mr.Hagstrom as my no.1 references and guidance in analysis. how do you think about it? is Buffett’s approach can be applicable in emerging market ( Indonesia) or it need several modifications? any advice? sorry this maybe going too long for u :)) thank u v much for u’r help, if there are any useful information that can help my thesis u can contact me at Onaldmj@gmail.com once again thank u

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