Only Three Stocks? The Diversification Debate — Myth vs. Reality

There’s always that swaggering claim from a new investor:

“I don’t need diversification. I only hold three stocks — and they’re killers.”

And sure… Warren Buffett and Charlie Munger famously said that diversification is protection against ignorance. Their philosophy was simple: if you really understand the few companies you buy, you don’t need 50.

But here’s the nuance nobody mentions in the “concentration is king” memes:

Concentration builds wealth. Diversification protects it.

The Hidden Truth: Only a Small % of Stocks Drive Almost All Market Gains

Multiple studies (including research by Arizona State University and data from Hendrik Bessembinder) show something stunning:

Only about 4% of publicly traded stocks account for nearly all of the stock market’s long-term gains.

Four percent.

That means the vast majority of stocks underperform or simply match treasury bonds. The huge market returns we hear about come from a tiny sliver of “monsters” — companies like Apple, Amazon, Nvidia, Tesla, Starbucks, and Microsoft.

Starbucks Example

Starbucks is one of those rare wealth engines.From its IPO in 1992 through the 2010s, Starbucks delivered roughly 20%+ annualized returns for nearly two decades.That’s the kind of stock that turns $10,000 into more than $1,000,000 — but only if you owned it.

The challenge?

You don’t know ahead of time which company will become the Starbucks of the next era — unless you are exceptionally good at research and analysis.

The Role of Diversification: Exposure = Opportunity

Most investors don’t lack intelligence — they lack exposure.

Diversification isn’t about watering down your returns.It’s about increasing your odds of owning one of the few stocks that experience explosive growth.

If only 4% of stocks create the majority of market wealth, owning just three or four companies gives you a very small chance of hitting a winner.

More stocks = more lottery tickets(but with the math of capitalism backing you instead of luck).

The Risk: Black Swan Events

Even if you’ve picked a rock-solid company, a black swan event can nuke an investment overnight.

A black swan is an unpredictable, high-impact event that destroys a company’s business model.

Example: Kodak

Kodak dominated photography for decades. They had global brand recognition, market share, and cash flow. But the digital camera revolution — a black swan — blindsided them. Investors who were concentrated in Kodak didn’t just lose a stock;they lost a future.

Concentration works… until it doesn’t.

So What Does “Enough” Diversification Look Like?

Here’s a practical approach:

✅ Individual Stock Approach

Hold at least 15 individual stocks of roughly equal weight.Fifteen stocks dramatically reduces company-specific risk while still letting you find the next Starbucks.

✅ ETF Approach

If you prefer simplicity, one ETF can diversify you instantly:

• One S&P 500 ETF = ~500 companies

• One total-market ETF = ~4,000 companies

• One global ETF = ~8,000 companies

  
  

In one click, you give yourself exposure to thousands of potential future mega-winners — including that coveted top 4%.

The Balanced Strategy

Strategy	Pros	Cons
Concentration (3–5 stocks)	Huge upside if you picked correctly	One black swan = portfolio ruined
15-stock diversification	Exposure to mega-winners + risk control	Requires monitoring & research
ETF-based diversification	Instant safety + effortless exposure	Less chance of massive outperformance

Final Takeaway

You don’t need dozens of stocks.You need enough different opportunities for one of them to be a monster.

Diversification increases your chance of owning the next Starbucks.Concentration increases the size of your bet — and your risk.

The art is knowing when to do which.

Build wealth through focused conviction.Protect wealth through intelligent diversification.