I shared Charlie Munger’s take on concentrated portfolios a few weeks ago. For similar reasons, I thought I’d share John Maynard Keynes’s view on it as well.
Keynes’s reasoning comes as a response to criticism from Francis Scott for taking a too large position in Elder Dempster stock. He initially explained his reason for buying like so:
…finding a security which was good, which we had not got and of which a large block could actually be purchased — an accumulation of circumstances I had not come across for months — I lost my head. I was also suffering from my chronic delusion that one good share is safer than ten bad ones, and I am always forgetting that hardly anyone else shares this particular delusion.
Pointed as that last sentence is, it shows that the unpopularity of concentrated portfolios is nothing new.
Even more, it shows how a majority of people can see one thing as risky while others don’t and both can make a sensible argument to their correctness. Scott replied with his opposing view, which fits the argument against concentration still used today. Continue Reading…