Broadly diversified funds that own hundreds of companies across a multitude of industries are designed to hedge against mistakes and losses. Managers of these funds spread their assets far and wide with the belief that some losses here and there won't hurt overall returns. Accordingly, any stellar singular gains will not have much impact on total returns, either. Highly diversified funds are engineered for mediocrity. 

That kind of watered-down approach to portfolio allocation stems from a mindset of uncertainty and a lack of conviction. Otherwise, why would fund managers put money behind, say, their "30th-, 31st- and 32nd-best ideas," when they could put it toward their most inspired, "eureka moment" idea? 

It is not atypical for Fairholme to maintain focused portfolios that hold no more than 20 securities.

Our approach to investing involves risk. A focused portfolio means that a steep decline or rise in any one security's market-driven price can sharply impact performance. So, yes, portfolios invested with Fairholme's focused approach may experience relatively high volatility no matter the overall market conditions. So why keep all our eggs in such a relatively small basket?

Our research suggests that as portfolio diversification increases, performance will, by definition, tend toward the market average. In other words, the more S&P 500 stocks we hold the more likely our returns will mirror the S&P 500 index average (before expenses). We're all about quality over quantity, and putting money behind our convictions.  

Our clients are often surprised to find that our biggest gains spring from buying up stocks during their worst performance periods. It's after these downturns that committed investors learn that market adversities often create great long-term benefits, and that it truly can pay to ignore the crowd.