*How many things to own is not a technical detail to be settled by a rule of thumb. It is a statement about how much an investor trusts their own judgement.*
The question of how many holdings a portfolio should contain is usually treated as a technical matter, settled by some rule about how many positions are enough to be adequately diversified. This treatment obscures what the question actually is. The decision about concentration is a decision about how much an investor trusts their own judgement, and it deserves to be recognised as such, because that is what is really being wagered.
The case for concentration is coherent and has been made by serious people. If an investor has genuinely identified a small number of excellent opportunities, and if their analysis is sound, then spreading their capital across many additional holdings necessarily means putting money into their less good ideas. Diversification, in this view, is a dilution of one's best thinking, and the investor who owns fifty positions cannot possibly know fifty businesses well. Concentration allows depth of understanding, and depth of understanding is what produces the advantage in the first place.
The case for diversification is equally coherent and rests on a different premise, namely that individual judgements are less reliable than those who hold them believe. Any single analysis, however careful, may be wrong for reasons the analyst could not have anticipated. A business may be undone by an event no one foresaw, by a fraud, by a technological shift that arrives faster than expected. Diversification is not a confession of ignorance about any particular company; it is a recognition that the future is genuinely uncertain and that no analysis, however good, eliminates that uncertainty.
The choice between them therefore turns on an assessment that most investors are poorly equipped to make honestly, which is how good their judgement actually is. Concentration is appropriate for someone whose analysis is genuinely reliable and who has the resources and temperament to withstand the consequences when it is not. Diversification is appropriate for everyone else. The difficulty is that the confidence required to concentrate is precisely the confidence that unreliable analysts also possess, and it provides no information about which group one belongs to.
The asymmetry of consequences deserves particular attention, because it is what makes the decision serious rather than merely interesting. A concentrated investor who is right may do very well indeed. A concentrated investor who is wrong may suffer a loss from which their portfolio does not recover within any horizon that matters to them. A diversified investor who is right does moderately well, and a diversified investor who is wrong absorbs the error and continues. The distributions are not mirror images, and an investor who is honest about the possibility of catastrophic error will weight the downside more heavily than symmetry would suggest.
There is a version of concentration that is not a choice at all but an accident, and it is worth naming because it is so common. An investor may hold what appear to be many different positions and yet be concentrated in a single underlying exposure, if those positions all depend on the same industry, the same economy, or the same set of conditions. Diversification by count is not diversification by substance. An investor who owns twenty companies that would all be damaged by the same event has one position, expressed twenty ways, and they may not realise it until the event arrives.
The reasonable middle ground, for most investors, is not a specific number but a principle: hold enough that no single error can be ruinous, and few enough that one can genuinely understand what one owns. This is deliberately imprecise, because the appropriate figure depends on the investor's circumstances, their horizon, and the honest assessment of their own analytical reliability that only they can make. A rule offered as a universal number is a rule that has stopped thinking about the actual question.
The core-satellite structure, discussed elsewhere in this series, is one practical resolution of the tension, permitting broad diversification in the core while allowing concentrated conviction within a bounded portion. It does not eliminate the underlying question but it makes the answer safer, by ensuring that the concentration expresses judgement without staking everything on it.
One consideration that often settles the question in practice, and that has nothing to do with analytical ability, is what a severe loss would actually mean for the investor's life. Two people may possess identical judgement and reach identical conclusions, and yet concentration may be entirely reasonable for one and reckless for the other, simply because one can absorb the consequence of being wrong and the other cannot. An investor with substantial other resources, a long horizon, and no foreseeable need for the capital occupies a different position from one whose portfolio represents the whole of their financial security. The analysis has not changed; the consequences of an error have. This is why the question of how much to concentrate cannot be answered by examining the opportunity alone, and why any advice that recommends a level of concentration without knowing the circumstances of the person receiving it has skipped the most important variable in the calculation.
At VESTFY™ this question is framed as a matter of honest self-assessment rather than a technical parameter. An investor who concentrates should be able to articulate why they believe their judgement is reliable enough to justify it, and should treat the difficulty of answering that question as informative. Humility is not a weakness in an investor; it is frequently the thing that keeps them in a position to benefit from the judgements they do get right. Surviving one's errors is the precondition for everything else, and diversification is, at bottom, simply a structural expression of that fact.