FROM THE HOLLYWOOD PITCH

to political talking points, we live in a world of sound bites. Just about everything, it seems, is boiled down to its essence. Smart investing is no exception.

Since you can't bet on everything in the markets, it's imperative that an actively managed portfolio be equally focused. That's because the most economical use of capital comes from homing in on a handful of key investment themes. In the words of Mark Twain, "Put all your eggs in one basket then watch that basket."

At any given time, my hedge fund is involved in no more than a half-dozen investment themes. It might be an asset class such as gold, or a particular sector such as utilities or a group like foreign stocks. The point is that the portfolio's risk is centralized around a few major ideas.

In an obsessive effort to reduce risk, we frequently limit any chance of reward as well. Far too often, diversification becomes the excuse for disorganized and inefficient portfolios hodge-podge collections of ill-sized securities and broad, overlapping mutual funds set adrift without any apparent plan or strategic approach.

What sinks these investors isn't their stock picking, but their inefficient use of capital. Big chunks of money are pledged to funds so diversified that only a double-digit move in the Dow or S&P could make owning such large positions worthwhile. And while a particular stock holding might indeed rally, the position size is inevitably so small that the move has no meaningful effect on the portfolio's bottom line. Capital is invested, but not in an economic or effective manner. Even successful stock picks aren't fully exploited.

I put money to work around a big idea. I take a focused, thematic approach that, just like a TV sound bite, can be easily summed up in just a few words. Regular readers will recognize the strategy. From Internet stocks to Latin American names, over the years I've highlighted numerous specific ways in which a focused approach would've garnered substantial gains.

But just because an investing theme can be reduced to a few words doesn't mean it's easy to execute. In the markets, nobody knows what's going to happen. With that in mind, I use two basic strategies to establish positions once I've chosen a theme worth pursuing. Depending on the nature of the investment, I'll employ either a concentrated or a comprehensive technique.

A concentrated approach means taking a larger position in a small number of securities all connected to one major theme. It's a strategy that tends to work best in more liquid, established markets. The primary goal is simply exposure to the asset class.

Gold, which I last wrote about a few weeks ago, provides an excellent example. If you believe gold is a worthwhile long in today's market environment, then the idea would be to establish such a position in the most economical way possible. Rather than buy a half-dozen different gold stocks, I'd take slightly larger positions in a smaller number of benchmark securities highly correlated with gold. ASA, for example, is a closed-end fund with broad exposure to precious metals, and both Newmont Mining and Glamis Gold are dominant members of most gold indexes. A healthy position in any of these would quickly achieve the goal of getting direct exposure to gold.

Or say you expect non-U.S. companies to outperform their domestic counterparts, leading to the big idea of European stocks. Instead of subjectively determining which equities are worth owning, you could simply get exposure to the asset class through one of the popular exchange-traded funds that tracks European stocks. For example, iShares S&P Europe 350 Index Fund holds a broad assortment of European stocks such as HSBC Holdings and GlaxoSmithKline. And while the ETF itself is diversified, establishing a 3% to 6% position size within a portfolio would constitute a concentrated approach that would directly benefit from the relative strength in non-U.S. stocks. StreetTRACKS Euro Stoxx 50, which I highlighted last December, would also effectively achieve the same exposure.

The other general method for playing a big idea comes in what I call a comprehensive approach. It involves taking a larger number of smaller positions around a central theme. It's most effective when used for very specific industries, or in those sectors that lack an ETF or other index-tracking security.

For example, take utilities stocks, a sector in which regular readers know my fund is currently heavily involved. Given the weakness in the dollar, it appears to me as if foreign utilities offer up the best potential for appreciation. And because foreign utilities is a very specific theme, I'm able to take a comprehensive approach and establish positions in virtually every legitimate name.

In this case, I don't just dip my toe in the water; rather, I cannonball in with both feet. If I want exposure to foreign utilities, then I'll take numerous positions in a half-dozen or so of what I believe to be the most promising names. I buy some large stocks caps like Enel and Eon along with some smaller names like United Utilities, International Power or Companhia Energetica de Minas Gerais. I'll buy the foreign natural-gas plays like BG Group, or the water utilities like Veolia Environnement or Suez. Shortly put, I'll canvas the sector, knowing that, should the overall idea hit, I'm well positioned to have at least one holding that generates a substantial return.

I can't stress enough that small positions are all but worthless because they rarely boost the overall return of a portfolio. The same goes for large allocations to overly diversified funds. These are two of the most common ways that resources are inefficiently deployed.

To me, a more focused approach, in which a limited number of major themes dominate a portfolio at any given time, makes more sense. Using proper technique, a concentrated (read: large) position in a specific sector or asset class is an effective way to participate in a trend. In more limited markets, I'll opt for a more comprehensive strategy that involves purchasing a larger number of securities across the entire spectrum of a specific idea. Winners are preserved, losses are minimized, and, ideally, the theme comes into fashion with a few of your holdings leading the charge.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned in this article.