How to Increase the Odds of Owning the Few Stocks that Drive Returns

Some investment strategists advocate concentrated “best ideas” portfolios as the surest path to equity market outperformance. The premise is obvious: When a portfolio consists only of a manager’s best ideas, returns are undiluted by second-best or lesser ideas—but the reality is different. We used simulations and empirical analysis to evaluate the relationship between portfolio diversification and outperformance. We found that increasing...