For example we are in a scenario where we have $50k set aside to invest. We decided to diversify among 10 positions of say about $5k each. Position sizing keeps our risk per investment trade within a set limit. This is to mitigate company-specific risk to avoid the portfolio makeup being overly concentrated in a certain company. This would in turn reduce the volatility of your portfolio. No matter how good a company is, it is possible to face significant drawdowns every few years due to industry related issues or the broader market having a decline in general.
But for investors who are not a know-nothing investor like Charlie Munger, it is common to see that they are usually more in favor of a portfolio that is concentrated among their highest conviction. As Warren Buffett says before, “Diversification may preserve wealth, but concentration builds wealth.” This is because by being more broadly diversified, an investor would be closer to earning market returns. (Market returns is not necessary a bad thing though because the average investor performs below market returns)
Such investors who believe in having a more concentrated portfolio often have long holding powers and can stomach a wilder volatility than the average investor. In the long run, they are often right much more than they are wrong and earn greater returns. In the short term, they may take hits that will cause their portfolio to underperform momentarily which they are comfortable with.