Concentrated Security Positions

Put all your eggs in one basket—and watch that basket!

—Warren Buffett

Memo to investors: Follow this strategy only if the person watching the basket is Warren Buffett.

In point of fact, Mr. Buffett wouldn't think of putting all his eggs in one basket. Last I looked, Berkshire Hathaway owned more than 30 individual stocks, representing a well-diversified portfolio of companies ranging from huge multinationals to mid-sized firms to local retailers. If we (or even Warren Buffett) found ourselves sitting on the odd pile of cash—say, $100 million—what are the odds that we would invest it all in one stock? The odds aren't just low, they are zero. Only a lunatic would even think about it.

Yet, when we end up, one way or another, owning only one stock, how many of us immediately diversify the position away? Sure, the situations are different, but they are different mainly in that when we own one concentrated position, rather than cash, we are likely to have a tax issue (and an emotional issue).

But it's a mistake in the first place to think of ourselves as being worth $100 million if we have an imbedded $15 million tax liability. Our real net worth is $85 million. The tax authorities are making an interest-free loan to us, and there are many ways we can leverage that opportunity. But the tax is owed and will eventually have to be paid in one way or another.

Another, related, excuse goes something like this: If I sell my $100 million position in Tyco, where ...

Get The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.