Consumer products marketers often talk about the “heavy half.” The idea is that a relatively small subset of a product’s buyers use the product often enough that they generate most of the sales. Say, 10% of the Bud Lite users account for 60% of the cases sold. The Pareto Principle, the idea that 20% of the customers create 80% of the sales, is another way of framing the same idea.

There’s something like the heavy half in equity portfolio management, especially for growth-style managers, who typically hold much more concentrated portfolios–maybe 50 stocks, maybe fewer–than their value counterparts, who can have a couple of hundred names. In all likelihood, three or four of the stocks in a growth portfolio will end up creating most of its outperformance.

The other 45+ are there for two related reasons:

–no one knows, or at least I don’t, when an idea will catch fire in the overall market. If I’m lucky I have a pool of ten solid ideas that I think could do very well. Experience tells me that only two or three names will perform in the way I’m expecting, but I really don’t know which ones they’ll be. So I hedge.

–the rest of the portfolio is there for defense, to force me to be aware of what’s happening in sectors I see less potential in and to mitigate the damage if the areas I’ve taken money from to build up my overweights begin to perform better than I think they should. Yes, I expect to make money in these areas, but it’s more important to me that they not punch a huge hole in the bottom of my boat.

Not everyone follows this approach. Take the ARKK portfolio of billionaire Cathie Wood. Its results over the past five years are as follows:

Tesla +1300%

NASDAQ +73%

S&P 500 +55%

ARKK -7%.

Ms. Wood understood far earlier than the consensus (me included) the profound changes in the automotive industry that TSLA would set in motion. If she had become a sell-side auto analyst, she might well be the most famous securities analyst on the planet.

If we assume that she maintained an average 5% position in TSLA in her ARKK fund over the past five years (I’ve plucked a figure out of the air that seems right to me, but I make no claim that this is correct; the TSLA position is 11.8% now). If so, TSLA would have contributed about +65% to overall portfolio performance. This would imply that the non-TSLA portion of the portfolio lost something like 60% of its value over the last-half decade (even after adjusting for distributions amounting to about 10% of nav over the period). This is in a NASDAQ market that was up by 73%.

If the average TSLA position were 2%, its contribution to overall results would be +26% and the rest of the portfolio would have lost about a quarter of its value.

I’ve been sitting here for a while, thinking to myself that, given the apparent magnitude of the underperformance, the last four paragraphs can’t possibly be correct. I got the performance figures from Yahoo Finance, however, and the distribution amounts from the ARK website. I did add the 10% to ARKK performance rather than doing a time-weighted calculation, but that shouldn’t have made much difference–and the NASDAQ and S&P results remain capital changes, not total returns, giving ARKK an edge.

I guess it’s possible Ms. Wood traded TSLA badly or that she abandoned what I think has been her best idea for part of the time. Still, this is an example, more extreme than I’d realized, that defense counts for a lot.