We intend to hold between 15 and 25 businesses in the portfolio at any one time. For some context, this compares to roughly 1,600 businesses in our benchmark, and thousands of businesses listed on stock exchanges around the world.
There are several reasons we choose to manage a concentrated portfolio.
Research has shown that the additional reduction in volatility and risk achieved by adding a second, fifth or fifteenth holding to a portfolio is substantial. However, by the time a portfolio has between twenty to twenty-five holdings, the additional reduction in volatility from an additional holding is small; beyond twenty-five, the benefit is negligible. Additionally, there are behavioural considerations to keep in mind.
As one keeps adding holdings to the portfolio, one eventually ends up adding the 30th or 50th 'best idea'. Eventually, this means the number of low-conviction holdings in the portfolio starts to outnumber the actual 'best ideas'. We prefer to own a limited number of businesses we know and understand well, leading to a competition for capital when introducing new holdings in the portfolio.
Finally, adding enough additional holdings will eventually lead to owning the entire market. At this point, the investor will merely earn a market return. Because our goal is to outperform the market over time, a concentrated portfolio is a surer path to achieving this.