Concentration Risk: When One Bad Bet Can Kill You

What this model means

Concentration risk is what happens when too much of your exposure sits in one customer, one sector, one geography, or one trade. If that single cluster goes bad, you’re not just hurt—you might be finished.

Diversification is the defense. But many businesses, investors, and even countries end up concentrated without realizing it, because early concentration often looks like smart focus. The difference between “focus” and “fragility” only becomes clear when the bet goes wrong.

Why it matters

Concentration risk kills institutions that look solid on paper. A bank that earned fat margins from one big client suddenly loses that client. A manufacturer that relied on one supplier faces a single factory fire. A country whose budget depends on oil exports watches prices collapse.

The model is a reminder to regularly audit: Where am I most exposed? If this one thing goes wrong, what happens to everything else?

Examples

1. The Medici Bank (15th century)

The Medici leaned heavily on papal business and a few powerful courts for much of their profit. In the early days, this concentration looked like smart focus—they had the best relationship with the Vatican. Later, it became a liability. When the Papacy turned hostile (after the Imola dispute) and major borrowers like the Duke of Burgundy defaulted, the hits didn’t just dent profits—they blew holes in the balance sheet that more diversified banks might have absorbed. Read more in Medici Bank.

2. Enron and merchant-banking concentration (2001)

Enron looked like a diversified energy company. In reality, a huge part of its value came from mark-to-market gains on complex trades that couldn’t actually be sold at those prices. When confidence cracked, the entire structure collapsed in weeks. The “diversification” was an illusion; the real exposure was to a few concentrated bets on their own accounting assumptions.

3. Single-customer businesses

Many suppliers discover too late that 40% of their revenue comes from one big client. Walmart, Amazon, or Apple can make or break their vendors. When the relationship ends or pricing changes, concentrated suppliers scramble or fail.

4. COVID-19 and global supply chains (2020)

Companies had optimized for efficiency by sourcing from concentrated regions—chips from Taiwan, manufacturing from a few Chinese cities, PPE from single suppliers. When lockdowns hit, the fragility of concentration became visible all at once.

How to use it / common failure mode

Regularly ask: If my biggest customer left, if my main market crashed, if my key supplier disappeared—what would happen?

Track your top customer share, your top-3 revenue sources, your geographic dependencies. If the answer to “what if this one thing breaks?” is “we’re finished,” then you don’t have a business—you have a dependency.

Build optionality before you need it: backup suppliers, secondary markets, reserve funds. Concentration feels efficient until the concentrated risk materializes.

Failure mode: Over-diversifying into things you don’t understand. Concentration risk is real, but spreading too thin can dilute focus and expertise. The goal is appropriate diversification—reducing fragility without losing edge.

In one line: Concentration risk means relying too heavily on one bet—so when that bet goes wrong, everything goes wrong.

This article was produced with AI assistance and human editing. Last updated Dec 14, 2025.