The Fundamental Law of Active Portfolio Management

Wide diversification is only required when investors do not understand what they are doing.

—Warren Buffett

Buffett’s quote seems to contradict quantitative investment approaches: Quant funds often diversify across hundreds or thousands of positions. Do quant funds know what they are doing?

You already know Warren Buffett is an effective fund manager, perhaps the best ever (see Figure 10.1). What might we learn from his investing style? We can learn a lot, of course, but let’s focus here on his allocation strategy: How does he apportion Berkshire Hathaway’s (BRK-A and BRK-B) assets across the various equities they hold? (Figure 10.1).

Buffett invests strongly in a small number of ...

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