Peter Lynch ran Fidelity's Magellan Fund from 1977 to 1990 and averaged roughly 29% a year. So when an audience member at a 1997 investment conference asked him to weigh concentration against diversification, his answer carried weight. He did not believe in diversification at all.
Lynch's objection was to diversifying for its own sake. Investors, he argued, buy one holding to offset another, and then watch both fall. Spreading money across companies you barely understand does not reduce risk. It only dilutes the ideas you do understand. If he could find a single great stock, he said, he would be content to own just that one.
The second half of his answer is the part most people skip. Lynch said that when he found ten stories that were equally attractive, he bought all ten. Then he waited. He compared it to "watching 10 poker games" as the cards turn over. One story improves, another slips, a third stays the same while its price jumps 50%. He would sell the one that had run ahead of its story and add to the one that had become better and cheaper.
That is the real lesson. For Lynch, a portfolio was not a set of positions built to balance each other. It was a list of separate investment cases, each with its own reason to exist, and the number of holdings was simply the number of good cases he had found. The work was in following each story closely enough to know when the facts had changed.
There is some irony here, since Magellan held more than a thousand stocks at its peak. But the principle held at any size: own what you can explain, and let the count follow the ideas.
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