As Buffett summarizes, a policy of portfolio concentration should serve to increase “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.”
Focusing on only a handful of stocks should not, therefore, increase portfolio “ risk,” at least as it is defined by the layperson—that is, the possibility of incurring financial loss.
- The intelligent investor will only select those stocks that exhibit the largest shortfall between quoted price and perceived underlying value—that is, those securities that are likely to provide the greatest margin of safety against financial loss in the long term.
- Although a compact suite of stocks will be undeniably more volatile than a diversified holding, short-term price fluctuations are of little concern to a long-term holder of stocks who focuses on income rather than capital appreciation.
- Indeed, value investors favor those stocks that display the potential for extreme volatility— the difference is that these investors expect predominantly upside volatility.
Risk, for value investors, is not a four-letter word—it is embraced and addressed proactively, not defensively