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.