The strategy we’ve adopted precludes our following standard
diversification dogma. Many pundits would therefore say the strat-
egy must be riskier than that employed by more conventional in-
vestors. We disagree. 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 diction-
ary terms, as “the possibility of loss or injury.”

On the other hand, if you are a know-something investor, able
to understand business economics and to find five to ten sensibly-
priced companies that possess important long-term competitive ad-
vantages, conventional diversification makes no sense.

Another situation requiring wide diversification occurs when
an investor who does not understand the economics of specific
businesses nevertheless believes it in his interest to be a long-term
owner of American industry. That investor should both own a
large number of equities and space out his purchases. By periodi-
cally investing in an index fund.