Focus Investing

Focus Investing (also known as 'Concentrated Investing') is an investment strategy centered on holding a relatively small number of stocks that the investor understands with exceptional depth. It is the philosophical opposite of broad diversification. The strategy is famously captured by the aphorism, “Put all your eggs in one basket, and watch that basket very, very carefully.” This isn't a call for reckless gambling; it's a call for extreme diligence. Instead of spreading capital thinly across dozens of “decent” companies, the focus investor allocates significant capital to only a handful of “great” businesses. The core belief is that an investor’s time and analytical ability are finite. By concentrating these resources on a few select opportunities, one can develop a deep understanding of each business, its valuation, and its long-term prospects. This intense research is the foundation of the strategy, making it a natural extension of the value investing philosophy practiced by luminaries like Warren Buffett and Charlie Munger, who argue that true investment risk comes not from concentration, but from ignorance.

The logic behind holding just a few stocks is rooted in common sense. Can you really be an expert on 50 or 100 different companies? For most people, the answer is a resounding no. By limiting your portfolio to a manageable number of holdings—say, between 5 and 15—you can dedicate the time required to truly understand each business. This allows you to:

• Develop an Analytical Edge: While a true information advantage is rare in today's market, you can develop an analytical advantage. This means you interpret the publicly available information better than the average market participant because you have a deeper context of the company's industry, competitive advantages (moats), and management quality.
• Avoid “Diworsification”: Many investors are taught to diversify as much as possible. While diversification reduces volatility, over-diversification can lead to what Peter Lynch called “diworsification”—owning so many stocks that your portfolio is guaranteed to produce average results, especially after accounting for transaction costs and fees. Focus investing aims for exceptional, not average, returns.

Focus investing is not just a companion to value investing; it is often its ultimate expression. Benjamin Graham, the father of value investing, taught his students to think of stocks as ownership stakes in real businesses. To do this properly requires profound study, which is naturally easier to do for a few companies than for many. A focus investor takes this to heart. They live and breathe the financial reports of their chosen companies. Because each position is so large, the demand for a margin of safety becomes paramount. You aren't just looking for a cheap stock; you are looking for a wonderful business at a fair price, with so much value on offer that even if you are partially wrong in your analysis, you are unlikely to suffer a permanent loss of capital. As Charlie Munger puts it, successful investing requires you to find just a few great companies and then “sit on your ass.”

The primary allure of focus investing is its potential for extraordinary returns. The math is simple. If a stock that makes up 2% of your portfolio doubles, your overall portfolio grows by 2%. It’s nice, but not life-changing. However, if a stock that makes up 20% of your portfolio doubles, your entire net worth grows by a massive 20%. When a focus investor's deep research leads them to a big winner, the impact on their wealth is significant and can compound dramatically over time.

Of course, there is no free lunch in investing. The flip side of concentrated reward is concentration risk. If one of your major holdings performs poorly or, in a worst-case scenario, goes to zero, the damage to your portfolio is severe. A single bad decision can wipe out years of gains. This strategy is absolutely not for the passive investor, the easily panicked, or anyone who has not done the exhaustive homework required. It demands a rock-solid temperament and the emotional fortitude to watch a large portion of your wealth fluctuate—sometimes violently—without losing sleep or abandoning your well-researched thesis.

Before even considering this path, an investor must be brutally honest with themselves about their own personality, skill, and commitment.

Successful focus investors typically share a common set of traits:

• Deep Curiosity: They genuinely enjoy the process of business analysis, reading annual reports, and understanding what makes a company tick.
• Intellectual Humility: They are acutely aware of their own limitations and are quick to admit when they are wrong. They operate strictly within their “circle of competence.”
• Extreme Patience: They have a long-term time horizon, often measured in decades, not quarters. They are perfectly happy to do nothing for long periods if no compelling opportunities arise.
• Emotional Discipline: They can think independently and are unfazed by market hysteria, whether it's a euphoric bubble or a pessimistic crash.

For those intrigued by the philosophy but wary of the risk, a hybrid approach can be a sensible start. Consider a “core and satellite” strategy:

1. Core: The majority of your portfolio (e.g., 70-80%) remains in low-cost, broadly diversified index funds. This provides stability and market-level returns.
2. Satellite: The remaining portion (e.g., 20-30%) becomes your “focus portfolio.” Here, you can invest in your 3-5 best ideas—companies you have researched exhaustively and in which you have the highest conviction.

Ultimately, focus investing isn't about a magic number of stocks. It’s about the intensity of knowledge and conviction behind each one.