Now that we have established an understanding of the theory behind picking individual stocks and investments, the next question is how do we construct an investment portfolio to maximise our overall returns, not just the returns of specific assets. The key principle to fundamentally keep in mind before engaging in further analysis and reasoning is that a portfolio is no more than the sum of its parts. It’s easy in portfolio construction to think from a top-down perspective, but remember that the top is made up of the individual decisions nd activities of the bottom, and as such, analyse a portfolio from both directions.

Before we delve into our specific views on how a portfolio should be constructed on this spectrum, it is important to discuss the crucial concept of sizing in investing. The return of an investment portfolio is not just about how often you are right or wrong about your specific investment theses, although it certainly helps to be right more times than not, rather it is how much you stake when you are right and how much you stake when you are wrong that determines the overall returns. For example, you could be right in most of your investment theses but stake very small amounts on them while having a large amount invested in an investment thesis that turns out to underperform or lose money. The inverse situation is a portfolio where you are wrong about your investment theses but stake small amounts on these bets while staking a large amount on a singular correct investment thesis. Out of these two options, despite being more accurate in your analysis of the underlying assets, the second option with high errors and low correct bets but with high staking on the correct bet, will, in all probability, outperform the investment portfolio of mostly correct bets but only small stakes on those bets.

The optimal portfolio, assuming you have to own more than one asset, is one where you are right about your investment theses and those that have the highest return profile are staked the highest to maximise the total returns. Assuming you cannot reach this level of perfection, then the next best portfolio one is where you are staked large on the winners, and staked small on the losers. Again, you would rather be correct more than not, and be staked large on those correct ones, but even if you are wrong more than you are correct, if you stake correctly, you will still outperform those who are mostly correct in individual analysis but poor in their sizing of investment. Picking all the winners but putting nothing or only a little on them brings you far less financial gain than the person who is wrong all the time on small bets but puts the house on a few of their rare winners. To keep it simple, the return of a portfolio isn’t really about how often you are right or wrong, but rather how much you bet when you are right or wrong.

Once the foundations of individual asset selection and position sizing are understood, the natural progression is to consider how these parts come together to form a coherent, high-performing investment portfolio. At the heart of portfolio construction lies a central tension: the trade-off between concentration and diversification. These represent two ends of a strategic spectrum. On one end, a portfolio may consist of only a handful of or even just one high-conviction position, while on the other, it may hold dozens or even hundreds of holdings, each comprising a small fraction of the whole. The primary argument for concentrated investing is simple and compelling: you only need to be right a few times to generate outstanding returns—but you must be right in size. Some of the largest fortunes in investing history—those of Buffett, Munger, Soros, Druckenmiller—were not built on owning 50 to 100 minor positions. They were built on a few dominant insights, where capital was deployed with size, conviction, and patience. There is a practical ceiling to the number of truly exceptional ideas an investor can have at any one time and throughout their career. Ideas that are deeply understood, rigorously vetted, and held with high conviction are rare. Therefore, when such ideas do appear, they should be weighted accordingly in the portfolio. This is the essence of what Charlie Munger meant when he said: “The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t.” From a probabilistic perspective, being correct on a few large positions can generate outsized returns, especially when capital is concentrated into the highest expected-value opportunities. In fact, a few large bets throughout a career spanning a few decades are all that are needed for extraordinary returns. Put it another way, the wealthiest people in the world tend not to be investors diversified into a range of underlying assets, but rather entrepreneurs with extreme concentration in only one asset for a reason: the reason being that you will earn far higher returns and wealth being all-in on the best opportunities rather than being spread thinly across a large of good to bad options, the caveat of this being that you have to find and manage to be part of the best, which is much easier said than done.

Concentration inherently magnifies both upside and downside. The most obvious risk of a concentrated portfolio is being wrong in size. Even with thorough research and sound reasoning, reality often contains factors we cannot anticipate—what some refer to as unknown unknowns. Macroeconomic shocks, management missteps, competitive disruption, regulatory shifts, or simple misjudgments in thesis quality can all severely impair a concentrated holding. And for the individual investor—without the institutional resources of active fund managers—these risks can be harder to monitor, mitigate, or exit in real time. This is where diversification has its rightful place. Not as a hedge for ignorance, but as an expression of humility—a recognition that conviction, no matter how well-founded, does not guarantee correctness. A moderate level of diversification—across industries, regions, or business models—functions as a risk control mechanism, buffering the portfolio from the outsized impact of any single failed investment thesis.

However, diversification taken too far becomes counterproductive. Beyond a certain point, it erodes the power of your insights and drags your portfolio closer to the average. The logic is simple: if you continue adding positions, especially into your 30th, 40th, or 50th best idea, you are no longer allocating capital based on high-conviction understanding but rather diffusing it in pursuit of safety through numbers. And the law of large numbers applies—the larger the sample size, the more likely you are to converge on median outcomes. In effect, excessive diversification becomes self-imposed mediocrity. This is especially irrational if, as a skilled investor, you can identify assets that are not just high-upside but also inherently safer than the average company. For instance, a business that sits at the forefront of innovation, possesses durable competitive advantages, boasts strong free cash flow, and is backed by robust financial resources is likely to have better long-term survival, compounding ability, and strategic optionality than the typical publicly listed company. If your top ideas meet this profile, then logically, your top 5–10 investments should carry less long-term risk than your 30th or 50th. Therefore, the idea that more diversification always equals lower risk is flawed. Risk should be measured not by the number of holdings but by the quality, durability, and clarity of understanding you have about each. Poorly understood diversification is no better than poorly understood concentration.

That said, some modest diversification is still prudent—not because you doubt your core ideas, but because markets are uncertain, and you can be wrong. Diversifying into a handful of uncorrelated but still high-conviction positions creates a margin of safety not by diluting quality, but by ensuring your portfolio isn’t fatally exposed to a single blind spot or unforeseen externality. In short, own enough to survive, but not so much that you forfeit the opportunity to thrive. Concentration in your best, most well-understood ideas is how wealth is built. Sensible diversification is how that wealth can potentially be protected from ruin. The key is knowing where confidence ends and overconfidence begins—and allocating accordingly.

In a concentrated portfolio, each holding wields significant influence over the whole. This makes it crucial to remain responsive to new information and to have ongoing vigilance. If the thesis changes—due to macro dynamics, deteriorating fundamentals, or management decisions—investors must be willing to reassess and adjust positions accordingly. Dogmatic holding is not the same as conviction; the former resists evidence, while the latter embraces it.

One of the most essential principles in portfolio construction—especially within a concentrated strategy—is the concept of opportunity cost. Capital is finite. Every dollar allocated to one investment is a dollar that cannot be allocated elsewhere. Therefore, the question is not merely “Is this a good investment?” but rather “Is this the best available use of my capital right now?” As an investor, your goal is not to simply hold assets that are expected to perform well in isolation, but to hold assets that offer the highest expected return relative to their risk and relative to all other opportunities you could be pursuing. In essence, you should be constantly optimising your portfolio to contain only those investments with the lowest opportunity cost—those for which no clearly superior alternatives exist within your circle of competence. This is not a call to trade frequently or to time markets. It is a call to actively monitor both the fundamentals of current holdings and the universe of potential replacements. Investments should be held not out of inertia or hope, but because they continue to represent the best possible deployment of capital given current knowledge.

Selling an investment is often harder than buying one. Behavioural biases, such as loss aversion or the endowment effect, can lead investors to hold onto underperforming assets too long, or resist swapping them out for better ones. But to be an effective capital allocator, you must be willing to reevaluate and reallocate when the facts change or better options emerge. There are generally two broad conditions that should prompt a sale or reduction of a position. The first is if there is a deterioration in the fundamental thesis. If new information emerges that challenges the core assumptions of your investment—declining competitive advantage, deteriorating balance sheet, loss of pricing power, management misalignment, or industry disruption—then a reassessment is required. In a concentrated portfolio, where each position materially affects total return, there is little room for thesis drift or complacency. The opportunity cost of holding a deteriorating asset can be immense. The second reason is if there is an emergence of superior opportunities. Even if a holding is performing adequately, it may still be prudent to reallocate capital if you identify an investment with better upside potential, lower risk, or both. This is where true capital discipline comes in. The mere existence of a decent idea is not enough; the bar should always be the best available idea. Great investors understand that the only investments worth holding are those that dominate the available opportunity set. However, one must also remember the transaction costs involved in changing positions and factor that into the opportunity cost in any given moment. Being open to reallocating capital does not mean trading reactively or impulsively. Instead, it means maintaining a mindset of fluidity over fixity. You are not married to any holding. Every position should earn its place in the portfolio every day it remains there.

One of the most underrated virtues in portfolio construction is patience. Investing is not a game of constant action, nor should a portfolio be a repository for mediocre ideas simply to appear “fully invested.” In reality, compelling opportunities are rare, and discipline requires the willingness to wait until they emerge. Holding cash is not a sign of indecision or fear—it is a rational response when the opportunity set fails to meet the required risk-reward threshold. Sometimes, the optimal allocation is to do nothing, to preserve optionality, and to remain intellectually and financially ready. As Warren Buffett famously said, “The stock market is a no-called-strike game. You don’t have to swing at everything—you can wait for your pitch.” This idea runs counter to the hyperactive tendencies of many investors who feel pressure to be constantly invested or to own a large number of positions. But superior portfolio construction often comes not from filling every slot, but from resisting marginal ideas and concentrating only on those rare investments that justify both capital and conviction. The ability to wait—deliberately and rationally—is as much a part of investing as the ability to act.

In the end, building a high-performing investment portfolio is not a function of complexity, volume, or constant activity—it is a function of clarity, conviction, and discipline. A well-constructed portfolio is one that reflects your best thinking, your deepest insights, and your most asymmetric opportunities, sized appropriately to their true potential and their risks. Concentration in a few high-conviction ideas with a degree of diversification is how we believe meaningful wealth is best created and sustained. What separates great investors from average ones is not just the ability to pick winners, but the ability to size them correctly, to walk away from mediocrity, and to reallocate capital without attachment when superior opportunities arise. A portfolio should not be a static collection of past decisions, but a living, breathing representation of your best ideas—right now. Every position you hold should justify its place, not just on its own merits, but in light of all that you could own instead. The ultimate goal is not to avoid being wrong, but to ensure that when you are right, you are right in size—and when you are wrong, the damage is survivable. Portfolio construction is therefore not merely a technical task, but a strategic discipline—one that sits at the core of successful long-term investing.