Perhaps the most important investing lesson I got from Warren Buffett was the concept of having a "punchcard" limiting the number of investments I can make. Buffett has suggested an investor should be given a 20 hole "punchcard" at the start of his investing career. Yes, Buffett meant only 20 investments allowed over an entire career. By being limited to only getting to make 20 investments over a career, Buffett suggests each decision would be considered much more carefully and performance greatly enhanced.
Buffett certainly adhered to that philosophy as he made his way to becoming one of the richest people on the planet. Much of his billions can be attributed to just a few great investments.
In 1964 American Express shares were clobbered as the result of fears over potential liability the company had in relation to the infamous "salad oil scandal." Buffett did his homework, believed the fears over the eventual liability were overblown and made a big concentrated investment in American Express. In fact Buffett actually changed his investment rules inside the Buffett Partnership, increasing the amount he was allowed to put into one position to 40% in order to fully exploit the opportunity. Prior to American Express, Buffett had promised investors that no single investment would make up more than 25% of the Buffett Partnership.
Within two years with 40% invested in the company, Buffett has more than doubled his money on American Express. Buffett Partnership investors were happy.
In 1988 Buffett recognized that the price of Coca-Cola shares were very reasonable in relation to the bullet-proof nature of its franchise and the decades of growth it had ahead of it. He started buying shares in 1988 and did so continuously through the next couple of years. By the time Buffett felt he had invested enough, he had invested over $1 billion in Coca-Cola which at that point in time was over 33% of Berkshire Hathaway's (BRK.A) portfolio.
Today the value of Berkshire's Coca-Cola holdings is in excess of $13 billion. Berkshire Hathaway shareholders were happy.
The American Express investment was a concentrated bet on the market wildly overreacting and creating a tremendous value for an opportunistic investor. The Coca-Cola investment was a concentrated bet on a growth stock with years of compounding ahead of it. Classic Buffett.
Today though if you look at Berkshire's five largest positions, you see something much different. No concentrated bets that are likely to double several times in the next decade. Instead you see a very conservative looking portfolio (although still concentrated) with five American stalwarts all with very attractive dividend yields.
Here are five of Buffett's core positions (position size as of the last annual report) with good dividend yields:
Cost ($ millions)
Value ($ millions)
Wells Fargo (WFC)
US Bancorp (USB)
Berkshire will receive over $1 billion in dividends from these five positions in 2013. That is almost as much as Buffett originally invested in Coca-Cola.
The yields on Wells Fargo and American Express are still partially restrained by the impact of the 2008/2009 financial crisis. Expect both of those to continue to increase as the financial world gets back to a more normal state of affairs. Wells Fargo actually recently increased its dividend after receiving approval from the federal government.
Buffett's move to a more conservative looking portfolio is really simply a matter of the huge amount of money he now has to invest. Buffett has to invest billions of dollars at a time, so he is forced to invest only in the largest of companies with the majority of his funds. A high class problem to have.
And I think Buffett is doing us regular folks a favor. Many of us just aren't capable of making huge bets on companies and compounding our money at ridiculous rates like Buffett did back in the day. And quite frankly, we shouldn't be trying to invest like that.
What would be perfectly fine for us amateurs to do though is concentrate relatively heavily on some world class franchises with hefty dividend yields.
So investment advisors take note. Mr. Buffett has laid out a top notch portfolio of 5 stocks with income streams that you can stuff into your client's portfolio. Why work extra hard when you can simply piggy-back on Buffett? Odds are that doing so will improve your long-term performance anyway.
Reduced effort, reduced risk and likely higher returns. What isn't to like?