Forget Diversification: The Case for Concentration in Your Best Ideas

By sagebytes — 02 Apr 2025

Distilled from the 1993 Berkshire Hathaway Shareholder Letter

Focus on Intrinsic Value

Book value vs. intrinsic value: Book value is an accounting term measuring capital put into a business. Intrinsic value is the present value of cash that can be taken out during its remaining life.
Intrinsic value matters most: While book value may track intrinsic value at Berkshire, it's intrinsic value that truly counts for investors.

Be an owner, not a trader: Approach stock investments with the mindset of a business owner, not a stock trader.
Focus on economic characteristics: Look for businesses with durable competitive advantages and favorable long-term economics.
Management matters: Seek managers with demonstrated ability and integrity who treat shareholders as partners.

Concentrate on your best ideas: "It is apt simply to hurt your results and increase your risk" to put money in your 20th favorite business rather than adding to your top choices.
One good idea a year: "We'll now settle for one good idea a year" rather than trying to make hundreds of decisions.
Know your circle of competence: Stick with businesses you understand. "Why search for a needle buried in a haystack when one is sitting in plain sight?"

Long-term perspective: Buffett quotes Ben Graham: "In the short-run, the market is a voting machine... but in the long-run, the market is a weighing machine."
Tenacity in holding: "An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business."
Tax efficiency: Buffett illustrates with Li'l Abner's lesson—holding for long-term gains is significantly more tax-efficient than trading frequently.

Real risk isn't volatility: Buffett rejects "beta" as a risk measure. The true risk is the possibility of permanent capital loss.
Five key risk factors:
1. Certainty of the business's long-term economics
2. Certainty in management's ability
3. Certainty management will share rewards with shareholders
4. Purchase price
5. Effects of taxation and inflation

Coca-Cola's endurance: A single $40 share purchased in 1919 would be worth over $2.1 million by 1993 with dividends reinvested.
Long-term compounding: Even in 1938, despite concerns about saturation, a fresh $40 investment in Coca-Cola would have grown to $25,000 by the end of 1993.

Welcome volatility: "The true investor welcomes volatility" because irrational prices create opportunity.
Independence from daily quotes: After buying a stock, "we would not be disturbed if markets closed for a year or two."
Mr. Market as servant, not guide: Use market fluctuations to your advantage rather than letting them guide your thinking.