The risk that an excessive allocation to a single investment, sector, geography, or risk factor could cause outsized losses if that concentration performs poorly.
Deeper Explanation
Concentration risk is the source of both the best and worst portfolio outcomes: concentration in winning investments produces exceptional returns; concentration in losing investments produces catastrophic losses. Marks' approach to concentration is asymmetric — he concentrates in opportunities where the downside is well-understood and limited, and diversifies against risks that are uncertain and potentially large. The most dangerous concentration risk is often invisible: investors who think they are diversified across 20 stocks may find all 20 are exposed to the same macro risk factor (e.g., interest rate sensitivity, China exposure, or consumer confidence) — making the apparent diversification illusory.
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