We continue to look for stock ideas for the long term investor and Matt Koppenheffer summarizes the picks that Warren Buffett highlights in his annual letter. There is nothing that can be added to what it means to be selected by the Oracle from Omaha, and probably these stocks will have a pop from his recommendation; however, it is worth investigating them.
- IBM (NYSE:IBM): Buffett's company took a hefty stake in IBM, which was driven by Buffett himself
- Wells Fargo (NYSE:WFC) was one of those referenced in his statement "these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects."
- Bank of America (NYSE:BAC) has been through the wringer but Buffett gives the CEO credit for nurturing a huge and attractive underlying business that will endure after the current are consigend to history.
- CSX (NYSE:CSX) is a proxy for BNSF -- which Berkshire owns. So what applies to BNSF applies to CSX, and they are approximately the same size.
- Procter & Gamble (NYSE:PG) is a proxy Matt slipped in for Coca-Cola (NYSE:KO) or Wrigley, which I will replace with Coke, as that is what was referenced.
- Buffett notes that the simple approach of "buy commodities, sell brands" has "long been a formula for business success."
This is a list of well known names, but the banks will probably weigh down short term performance. In any case, it will be interesting to measure against our dividend-bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(NYSEARCA:TIP) iShares Barclays TIPS Bond|
|Emerging Market||(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond|
- 5 Stocks Buffett Gives the Green Light in His 2012 Letter -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||1%||1%||14%||10%||77%||8%||61%|
|5 Stocks Buffett Gives the Green Light in His 2012 Letter||4%||1%||4%||34%||134%||7%||21%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||5%||3%||18%||20%||133%||3%||12%|
We can see from the table that the returns are decent over all the time horizons we examine but that the Sharpe ratios are lower than the ETF portfolios indicating that there is additional risk (volatility) for these stocks. This is not a surprise as the banking stocks will have been through a torrid time over the past few years. In addition, this is only a selection of five stocks which will have greater volatility than a series of indexed ETFs.
It is a question of trust as to whether the two bank selections will start to thrive. That is something we each have to consider.
Three Month Chart One Year Chart Three Year Chart Five Year Chart
We can see that this selection took a hammering in 2009 and suffered again towards the end of 2011.
Taking up this portfolio now would mean buying into the notion that the worst is over for the better-run banks. That is not a big reach, and this portfolio has done decently over the longer period. This is definitely worth consideration.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.