Why Most Portfolios Are Built to Fail

The case for owning less and knowing more...

I recently asked a friend how many stocks he owned.

"About fifty," he said proudly. "Got to stay diversified."

I nearly spat out my coffee.

Here's the thing about owning fifty stocks: You don't have a portfolio. You have an expensive index fund masquerading as strategy. And what I'm about to tell you might make you uncomfortable. It might even make you question everything you've been taught about "proper" investing.

But sometimes, uncomfortable truths lead to extraordinary results.

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The Restaurant Theory

Imagine walking into a restaurant with fifty items on the menu. Now imagine walking into one with five. Which chef do you think knows their dishes better? That's concentration in action. Yet the investment world keeps pushing the equivalent of an endless buffet. More options. More stocks. More "safety."

Less thinking. More mediocrity.

Charlie Munger understood this perfectly when he said, "The way to minimise risk is to think." It's perhaps the simplest yet most profound investment advice ever given.

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The Concentration Paradox

When you own too many stocks, something insidious happens. Your best ideas get diluted. Your attention gets scattered. Your edge disappears. You end up knowing a little about a lot, instead of a lot about a little.

And in investing, that's a recipe for permanent mediocrity.

Here's what your financial advisor won't tell you: After 8-10 stocks, additional diversification barely reduces your risk. It just reduces your returns.

Think about that for a moment.

Every stock after number 10 is essentially just admitting you don't trust your own judgment. The truth about risk isn't what most people think:

Risk isn't owning five great businesses you understand deeply.
Risk is owning fifty mediocre ones you barely know.

As Warren Buffett notes, "Very few people have gotten rich on their seventh best idea." Yet most portfolios look like a teenager's Spotify playlist: endless additions, no curation.

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The Power of Focus

When you run a concentrated portfolio, everything changes. Every position matters. Every decision counts. Every investment gets your full attention. There's no room for "why not" positions or "maybe" stocks. Just pure, focused conviction backed by deep understanding.

This approach requires something most investors lack: courage.

It's easy to hide behind diversification.
It's harder to stand behind conviction.

But that's exactly what makes it valuable. The market rewards what's scarce, and nothing is scarcer than conviction backed by deep knowledge.

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The Hard Questions

Take a moment and ask yourself:

• Do I really know my 25th best stock?

• Could I explain it to a 10-year-old?

• Would I bet my retirement on my understanding?

If you hesitated on any of these, maybe it's time to concentrate. Because here's the truth about great investing: It's not about owning everything. It's about owning the right things. And knowing them cold.

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The Simple Math

Consider this: If you own 50 stocks and one doubles, your portfolio is up 2%. If you own 10 stocks and one doubles, you're up 10%.

That's the power of concentration.

It's not just about limiting downside - it's about letting your winners actually matter.

This links directly to our thinking on asymmetric returns - read more about that [here], but only after you've finished this one.

In a world obsessed with spreading bets thin, concentration is your edge. While others try to own everything, you can focus on knowing something. While they chase breadth, you can pursue depth.

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A Word of Caution

Concentration isn't for everyone. As Gerald Loeb wisely stated, "Once you attain competency, diversification is undesirable."

The key word here is competency.

Without the ability to analyse businesses deeply and the temperament to weather volatility, concentration can be dangerous. Make sure you're honest with yourself about your capabilities and comfort with temporary market swings.

And remember: Even with the deepest analysis and strongest conviction, randomness plays a role. The world is inherently uncertain. That's precisely why we focus on businesses we truly understand - not to eliminate randomness, but to navigate it intelligently.

Because at the end of the day, investing isn't about having the most stocks in your portfolio.

It's about having the most conviction in your positions.

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Until next week,
Dom
Schwar Capital

P.S. If these ideas resonated with you, share them with another thoughtful investor. The best ideas, like the best investments, compound when shared.

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.