Why High-Conviction, Low-Diversification Portfolios Can Outperform Over Time: Lessons from Charlie Munger's Top 3 Holdings

Charlie Munger, the longtime Vice Chairman of Berkshire Hathaway and a paragon of value investing, built his legacy on a philosophy of concentrated, high-conviction investing. His approach-focusing on businesses with durable competitive advantages and long-term compounding potential-has been a blueprint for investors seeking to outperform diversified benchmarks. As of 2025, Munger's publicly traded portfolio through Daily Journal Corp reveals a striking concentration in three stocks: Wells Fargo & Co (WFC), Bank of America (BAC), and Alibaba Group Holding (BABA). These holdings, which together account for over 97% of the portfolio's value, offer a compelling case study in how disciplined, low-diversification strategies can generate outsized returns over time.

The Case for Concentration: Quality Over Quantity

Munger's strategy hinges on identifying businesses with economic moats-sustainable advantages that protect profitability and market share. Wells Fargo and Bank of America, for instance, dominate the U.S. financial sector through their vast branch networks, diversified revenue streams, and digital innovation. Wells Fargo, with $1.96 trillion in assets as of Q1 2025, has rebuilt its reputation post-crisis by prioritizing asset quality and customer loyalty. Its Wealth and Investment Management segment, serving affluent clients through Wells Fargo Advisors, further cements its competitive edge. Similarly, Bank of America, with $3 trillion in assets, has leveraged disciplined risk management and a robust capital position to drive earnings growth, projecting a 13.9% rise in 2026 to $4.33 per share.

Concentration allows investors to deeply understand these businesses, a principle Munger championed. By allocating 45% of Daily Journal's portfolio to Wells Fargo and 39% to Bank of America, he bet on their ability to compound capital over decades. This contrasts with broadly diversified portfolios, which often dilute returns by including mediocre performers.

Alibaba: A High-Risk, High-Reward Bet

Alibaba, Munger's third-largest holding at 13.3% of Daily Journal's portfolio, represents a more speculative but potentially transformative position. As one of China's largest firms by market capitalization, Alibaba's dominance in e-commerce, cloud computing, and digital payments positions it to benefit from China's evolving economic landscape. While the source material lacks detailed performance metrics for Alibaba over the 2015–2025 period, its inclusion in Munger's portfolio underscores his willingness to allocate capital to high-conviction global leaders, even in complex markets.

The Power of Compounding and Conviction

Munger's personal investments-Costco, Himalaya Capital, and Berkshire Hathaway- further illustrate his preference for concentrated bets on high-quality businesses. These holdings, characterized by strong pricing power and enduring business models, have compounded at exceptional rates over decades. For example, Costco's membership model and efficient supply chain have driven consistent growth, while Berkshire Hathaway's conglomerate of moat-driven businesses has delivered market-beating returns under Warren Buffett's stewardship.

The Daily Journal portfolio's focus on financials reflects a similar logic. Wells Fargo and Bank of America, despite sector-specific risks like regulatory scrutiny, have demonstrated resilience and adaptability. Wells Fargo's projected 11.7% earnings increase in 2026 and Bank of America's diversified revenue base highlight their potential to generate stable cash flows-a critical factor for long-term compounding.

Risks and the Munger Framework

Critics of concentrated investing often cite volatility and downside risk. However, Munger's framework mitigates these concerns by prioritizing businesses with:
1. Durable competitive advantages (e.g., Wells Fargo's branch network, Alibaba's digital ecosystem).
2. Strong management teams capable of navigating macroeconomic shifts.
3. Attractive valuations relative to intrinsic value.

This disciplined approach ensures that concentration does not equate to recklessness. As Munger once noted, "The trick is to own a few things you really understand and ignore the rest."

Conclusion: A Timeless Investment Philosophy

Charlie Munger's portfolio, both through Daily Journal Corp and his personal investments, exemplifies the power of high-conviction, low-diversification strategies. By focusing on businesses with economic moats and long-term compounding potential, investors can outperform diversified benchmarks while managing risk through deep due diligence. In an era of market complexity and fleeting trends, Munger's lessons remain as relevant as ever: quality, patience, and conviction are the cornerstones of enduring wealth.