The Daily Buffett

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Focused Conviction

January 4th

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as 'the possibility of loss or injury.'

Warren Buffett

The concentrated portfolio, one that is made up of fewer, carefully chosen businesses, is often seen as a high-risk strategy. Yet, if approached with intensity of thought and a deep understanding of a business's economic characteristics, it could actually mitigate risk.

The concern of investing in fewer businesses is not unfounded. It comes with a perceived higher exposure to loss. This perception, however, can be significantly diluted by thorough research and utmost understanding. The mantra here is to know what you own and why you own it. This investment philosophy may seem like it goes against the grain, but it is this very approach that underlines the importance of an active engagement with your investments.

To employ this strategy is not for the fainthearted investor. It requires a deep-rooted understanding and confidence in one's investment choices. It calls for a move away from the safety net of diversification and urges an intense engagement with the businesses one chooses to invest in. This approach to investing, though demanding, could lead to a stronger, more resilient portfolio.

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