Risk comes from misjudgement of a company's prospects, not price volatility

Academics define risk as price volatility, and to counter that risk, they recommend holding a diversified portfolio.

But to value investors, like Warren Buffett, risk is the intrinsic value risk of a business, not the price behaviour of its stock. And intrinsic value risk, he says, comes from misjudgement of a company's prospects. He has extreme confidence in his ability to pick fundamentally strong companies which are trading at prices below their intrinsic value, and thus favours placing big bets on these companies.

You should have the courage and conviction to put at least 10 percent of your net worth into each investment you make, he says. "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," he explains.