Quora Answer: Is Holding Fewer Stocks Really a More Defensive Investing Strategy?

The following is my answer to a Quora question: “Is holding fewer stocks really a more defensive investing strategy?”

You assume that holding fewer stocks constitutes a defensive strategy.  It does not.  Holding fewer stocks is a concentration decision.  Whether that concentration is defensive, aggressive, or simply catastrophic depends entirely on what those stocks are, why they were selected, the investment horizon, the investor’s liquidity requirements, and the quality of the analytical framework behind the selection.

You conflate two separate variables: the number of positions and the risk profile of the portfolio.  These are related but not identical.  A portfolio of five utility companies is concentrated and defensive.  A portfolio of five early-stage biotechnology stocks is concentrated and speculative.  The number of positions tells you nothing about the risk without knowing what the positions are.

Diversification to Oblivion

The theoretical case for diversification is sound.  Dr Harry Max Markowitz — Nobel Laureate in Economics 1990 and the architect of Modern Portfolio Theory — demonstrated in his 1952 paper, Portfolio Selection, that combining assets with low or negative return correlations reduces portfolio volatility without proportionally reducing expected returns.  The practical application of this theory has produced something less elegant.

The KOSPI is not the only example of an index that is theoretically diversified but practically concentrated — it merely makes the problem visible.  The S&P 500 — 500 companies, the gold standard of diversification — had its top 10 holdings account for 35 per cent of the index’s total weight as of mid-2026.  A passive investor in the S&P 500 believes they own 500 companies.  They own, in terms of economic exposure, 10 companies with 490 satellites orbiting them.

The academic research on optimal portfolio size converges on a narrower range than most retail investors assume.  Studies by Dr Edwin J. Elton — Professor Emeritus of Finance at New York University Stern School of Business — and Dr Martin Jay Gruber — also Professor Emeritus at NYU Stern — found that 90 per cent of the diversifiable risk in a US equity portfolio is eliminated by holding 20 to 30 stocks with different business exposures.  Beyond 30 stocks, the marginal risk reduction approaches zero while the management complexity continues rising.

A portfolio of 100 stocks is not more diversified than a portfolio of 30 stocks selected with discipline.  It is a portfolio of 30 stocks plus 70 stocks that the investor either did not examine closely or could not distinguish from the first 30.  The additional positions add administrative cost, dilute the returns of the high-conviction ideas, and provide the psychological comfort of apparent diversification without its mathematical substance.  This is what I call diversification to oblivion: the portfolio is so spread that the investor’s best ideas are diluted by their worst ones, producing returns that approximate the index minus fees — a result achievable more cheaply through an ETF.

Concentration Risk

The opposite failure mode is equally documented.  Archegos Capital Management — the family office of Sung Kook “Bill” Hwang — held US$36 billion in fund assets and a total portfolio exposure of US$160 billion through total return swaps in March 2021.  The swaps were the mechanism of concealment: counterparty banks had no visibility into the aggregate concentration across the portfolio.  The positions were concentrated in a small number of stocks — ViacomCBS, Discovery, and several Chinese technology stocks.

When ViacomCBS conducted an equity offering and its share price declined, the margin calls triggered a forced unwind.  Hwang’s personal fortune of US$20 billion was wiped out over 10 days.  Credit Suisse lost US$5.5 billion.  Nomura lost US$2.9 billion.  The fund ceased to exist.  Hwang was convicted in July 2024 on 10 criminal charges, including wire fraud, securities fraud, and market manipulation, and sentenced to 18 years in federal prison.

The concentration was not the sole problem.  The leverage was.  The total return swap structure was.  The concealment from counterparties was.  But the concentration made each of these problems catastrophic: there were no offsetting positions to cushion the drawdown.  A diversified portfolio with equivalent leverage would have experienced pain.  Archegos experienced annihilation.  The lesson is not that concentration causes failure.  It is that concentration without the analytical rigour to justify it — and without the risk management framework to contain the downside — produces outcomes that leverage transforms from bad to terminal.

What the Great Concentrated Investors Do

Warren Edward Buffett — the founder of Berkshire Hathaway’s modern incarnation and its Chairman, who served as Chief Executive Officer for over six decades before retiring on 1^st January 2026 — has been the most consistently articulate proponent of concentrated, high-conviction investing.  Berkshire Hathaway’s public equity portfolio as of mid-2026 had 45 per cent of its value in a single position: Apple Inc.  The top five positions — Apple, Bank of America, American Express, Coca-Cola, and Chevron — accounted for 75 per cent of the portfolio’s total value.  The Berkshire equity portfolio is not diversified.  It has generated a compound annual return of 19.8 per cent from 1965 to 2024, against the S&P 500’s 10.2 per cent over the same period.  The outperformance is not despite the concentration.  It is partly because of it — because the concentration reflects conviction that was earned through analysis, and that conviction was not diluted by positions taken to fill slots in a diversification framework.

Charles Thomas Munger — the late Vice Chairman of Berkshire Hathaway, who died on 28^th November 2023 at the age of 99 — described the concept of over-diversification as “deworsification” — a term he borrowed from the fund manager Peter Lynch — and argued that a non-institutional investor with four to five well-understood businesses would achieve better results than the same investor spread across 40 positions they understood less well.  Peter Lynch — the fund manager who ran the Fidelity Magellan Fund from 1977 to 1990, generating a compound annual return of 29.2 per cent over that period — operated with a portfolio of several hundred positions at his peak.  This appears to contradict the concentration thesis until one examines the structure: Lynch ran a diversified portfolio because his fund’s assets under management made concentration mathematically impossible, not because he believed in diversification for its own sake.  His analytical framework was highly concentrated in terms of attention and conviction — he identified a small number of ideas with insight and built large positions, while the remaining positions were smaller and more speculative.

The Sequoia Fund — established in 1970 to manage capital for clients who had invested with Buffett’s partnership — operated for decades with 10 to 15 positions and generated returns that substantially outperformed the S&P 500 over long periods.  Its concentrated bet on Valeant Pharmaceuticals International, which grew to 30 per cent of the fund by 2015, illustrates the downside: when Valeant collapsed on accounting and pricing controversies, the fund lost 25 per cent of its value in a single year.  The position size that had generated exceptional returns for a decade became the mechanism of a near-terminal drawdown when the thesis failed.

The Strategy Framework

Whether a concentrated portfolio is defensive, aggressive, or appropriate depends on four variables that the question does not address.

Investment horizon — A 20-year investor can absorb a 40 per cent drawdown in a concentrated position if the fundamental thesis remains intact.  A 2-year investor cannot.  The KOSPI retail investors who piled into Samsung and SK Hynix leveraged ETFs in May and June 2026 with short-term return expectations experienced 75 to 80 per cent drawdowns within six weeks.  The same positions held over five years, with the same semiconductor thesis, would likely have produced positive returns.  The concentration was not the problem.  The horizon mismatch was.

Selection quality — A concentrated portfolio of businesses with durable competitive advantages, high returns on invested capital, low debt, and pricing power can be genuinely defensive.  These businesses — consumer staples, high-margin software, dominant infrastructure — tend to produce consistent cash flows regardless of the economic cycle.  A concentrated portfolio of cyclicals, speculative growth stocks, or leveraged balance sheets is concentrated risk, not concentrated defence.

Correlation — Holding five stocks that all decline in the same macro environment is not diversification.  It is five bets on the same outcome.  The diversification benefit comes from combining positions whose returns are structurally independent — not merely from having different ticker symbols.

Liquidity and leverage — Archegos was not a story about concentration.  It was a story about what leverage does to concentration when the thesis fails.  A concentrated portfolio without leverage has a defined downside: the position goes to zero.  A concentrated portfolio with leverage has an undefined downside: the position goes to zero, and then the margin calls claim everything else.

The Answer

Holding fewer stocks is not a defensive strategy.  It is a concentration decision that can produce any outcome on the risk spectrum depending on the quality of the selection, the investment horizon, the correlation structure of the holdings, and the leverage applied.  The investor who holds 20 well-researched, high-quality businesses with long time horizons and no leverage is running a concentrated portfolio that is, in practice, more defensive than the average diversified fund — because the diversified fund’s returns revert to the index mean while the concentrated portfolio retains the potential for genuine outperformance.  The investor who holds 20 stocks because they read that fewer is better, without the analytical framework to justify the selection, has simply reduced the number of mistakes they are making rather than the magnitude of them.  The number of positions is not the strategy.  The thinking behind each position is.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code