“Hugging” the Index May Limit Performance The Importance of Diversification in Risk Management

Avoiding Concentration Risks While Producing a Long-Term Return

Early in my career I had 20% of my portfolio in Johnson & Johnson just before Tylenol was laced with poison. My objective is to produce an above-average long term return, and I think I can do that without taking that kind of concentration risk. Things happen. If I really knew the best stock in my portfolio I’d put 100% of the portfolio in it, but I don’t. [Financial columnist] Dan Dorfman once asked me in an interview what the best and worst stocks were in my portfolio. I told him the worst stock was Converse, the shoe company, which he dutifully reported in his column. It got taken over two days later, up 50%.
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