Why I Hold 8 Positions, Not 40: The Case for Concentrated Investing

The average actively managed equity mutual fund in the United States holds 147 positions. The average underperforms the S&P 500 index over any ten-year period. I don't think this is a coincidence.

My core portfolio contains eight positions. I've held this structure for four years. Over that period my core book has outperformed the broad market index in three of four years. I'm not sharing this to brag — the fourth year was bad enough to be humbling. I'm sharing it because the structure itself is the reason for both the outperformance and the underperformance, and understanding why is the whole point.

The Math That Most Investors Ignore

Harry Markowitz won the Nobel Prize in Economics in 1990 for his work on portfolio diversification and the efficient frontier. His framework is used to justify holding 30, 50, even 100 stocks. Most of the people citing it haven't read the actual math.

Here's what the data shows on incremental risk reduction from adding positions:

Moving from 1 stock to 2 reduces portfolio variance (the statistical measure of risk) by approximately 46%. That's enormous. Moving from 2 to 5 reduces variance by another 22%. Moving from 5 to 10 reduces it by another 14%. Moving from 10 to 15 reduces it by another 4%. Moving from 15 to 20 reduces it by approximately 1.5%. Adding position number 50 to a portfolio of 49 reduces variance by roughly 0.01%.

Read that again: adding the 50th stock to your portfolio reduces measurable risk by one one-hundredth of one percent.

The law of diminishing returns on diversification hits a cliff at around the 12–15 position mark. After that, you're not reducing risk in any meaningful sense. You're diluting your best ideas with your 16th-best, your 24th-best, and eventually your 80th-best idea.

What "Owning Everything" Actually Means

When you hold 40, 60, or 100 individual positions, you have effectively constructed an expensive, actively managed index fund. You have index-level diversification without index-level costs, and with far worse tax efficiency because you're generating short-term capital gains on frequent rebalancing.

The brutal arithmetic: if your five best ideas return 40% each and your fifteen other ideas return the market average of 10%, a twenty-stock portfolio has a blended return of approximately 17.5%. A five-stock portfolio of only your best ideas returns 40%. You have literally paid for your own mediocrity by including ideas 6 through 20.

Peter Lynch ran Magellan with a large number of positions and outperformed — but Lynch was doing something most investors cannot replicate: he had a research operation and informational advantages. For an individual investor without that apparatus, concentration is the rational choice.

Warren Buffett's Position on This

Buffett has stated the case more bluntly than any data can. In a 1998 University of Florida lecture, he said: "Diversification is protection against ignorance. It makes very little sense for those who know what they're doing."

This is sometimes quoted out of context as arrogance. It isn't. It's a conditional statement: if you know what you're doing — meaning you've done the analytical work, you understand the business, you can monitor it — then diversification doesn't add value. It just guarantees you'll own things you understand less well alongside things you understand deeply.

The corollary, which Buffett is equally clear about, is that for investors who haven't done the work, a low-cost index fund beats almost everything. The argument for concentration is not an argument against passive investing. It's an argument for doing less, better.

My Eight Positions

I don't name specific holdings publicly for reasons I've written about elsewhere. But I can describe the composition by type, because the construction logic is what matters.

Position 1 — Large-cap consumer technology: A company I've owned since 2021, used personally every day, and understand deeply enough that I track quarterly results without needing analyst summaries. This is my largest position at approximately 13% of the core book.

Position 2 — Payment infrastructure: A rails business — a company that earns on transaction volume rather than consumer spending outcomes. The thesis is geographic expansion of electronic payments over cash in emerging markets. I've owned it for three years.

Positions 3 and 4 — Energy transition: Two companies in adjacent parts of the decarbonization supply chain. Not renewable energy stocks in the political sense — these are industrial businesses that happen to have secular tailwinds. I treat them as a pair because their risks partially offset each other.

Positions 5 and 6 — International: One European industrial compounder with 30 years of consecutive earnings growth. One Southeast Asian consumer platform that I believe is in year three of a ten-year penetration story. Both are denominated in foreign currencies, which provides a hedge I value.

Positions 7 and 8 — Opportunistic: These rotate more than the others. Currently one is a special situation: a company I believe is misunderstood by the market for reasons I can articulate in writing. The other is a smaller technology business at an early stage of a multi-year contract cycle.

What to Do With the Rest

I hold one additional pool of capital outside the core eight. It goes entirely into a low-cost index fund tracking the total global market.

This is not a hedge against my concentrated book underperforming. It's a structural separation between capital I'm actively managing and capital I'm letting the market manage. I don't try to beat the market with all of my money. I try to beat it with the capital I've allocated to the effort, and I let the rest compound without my interference.

The split currently sits at approximately 60% core book / 40% index. The index portion isn't glamorous. It also doesn't require any of my attention, doesn't generate capital gains on rebalancing, and has never caused me a sleepless night. That's not nothing.

The Options Overlay

On the four largest core positions, I run a covered call program — selling out-of-the-money calls against existing holdings when implied volatility is elevated. This generates additional income of approximately 2–4% annually on the positions involved, at the cost of capping upside beyond the strike price.

I don't do this to be clever. I do it because the businesses I hold most conviction in are also the ones where the market occasionally prices in more uncertainty than I think is warranted. When the VIX is elevated and a company I know well is being priced as though it might fail, selling options against it is a way of monetizing the gap between my assessment and the market's fear.

The Rule for Choosing the Eight

The filter I use has three tests, and a candidate has to pass all three:

1. Can I explain the business model in two minutes to someone with no financial background?
2. Would I be comfortable holding this position through a 40% drawdown without losing conviction?
3. Do I have a specific, observable thesis — not just a qualitative belief that the company is good?

If any of those three fails, the position doesn't belong in the core book. It might belong in a speculative allocation at reduced size. Or it might not belong in the portfolio at all.

The eight positions I hold all passed these tests when I entered them. I review them against these criteria once a quarter. When a position fails the review — thesis weakened, understanding diminished, ability to monitor reduced — it comes out, regardless of the unrealized gain or loss.

Eight is not a magic number. Some serious investors run twelve to fifteen and execute this framework well. Some run five. The number matters less than the discipline: own only what you understand deeply enough to own through difficulty.

If you can't say that about all forty of your positions, the math already told you what to do.

— Ruslan Averin