Nice Surprises – The View From The Blue Ridge

We recently had a portfolio manager, whom we had originally spoken to a few years prior about our offering, call and sign up for Alpha Theory. The manager had recently read a Berkshire-Hathaway investor letter and it reminded him of the core tenets of Alpha Theory and how some of the issues his fund experienced could be resolved by using a discipline like Alpha Theory. Of course we are honored that Buffett's philosophy would make a manager think of Alpha Theory, but after reading the letter, I definitely see the connection. The manager, Chris Pavese of Broyhill Affinity Fund, writes a regular blog called "The View from the Blue Ridge". This particular post of Chris's revolved around Buffett's 1966 letter to investors (the letter can be read on Chris's blog) which spent a great deal of time discussing the lack of importance of diversity. Or better said, diversification assumes finding good ideas is easy and it is not. It is worth a read and so is Chris's blog. In addition, there are many studies that show that diversification benefits decline dramatically at a very low number of positions (see Upson study). Another good reason to avoid the diversification trap.