The Challenge

Amar Pandit , CFA , CFP

Many of you loved my “91 and still compounding” post.

In case you cannot recollect it, click the above link, and read the post. It’s a simple yet powerful post. This one builds on the previous post about Warren Buffett.

I have asked one particular question to many investors.

The question is “Do you want to be Wealthy like Warren Buffett?

I almost always get a thumping “YES”.

My next question then is – “Will you behave like Warren Buffett for the next 30 years or Have you behaved like Buffett for the last 20 years – letting compounding do its job?

I never get an enthusiastic response to this one.

This reminds me of Boxer Joe Lewis’s quote “Everybody wants to go to heaven, but no one wants to die.

A recent post in CNBC had this headline “Warren Buffett’s winning equity portfolio is concentrated in just 4 stocks.

This headline was sure to catch eyeballs.

The first question that is likely to come to your mind is “Which are the 4 stocks?

I will give you the details (and some of you might know that already) but frankly it doesn’t matter.

Yes, you read it right.

Many people literally replicate Buffett’s portfolio and still manage to get completely different (subpar) results.

Buffett’s wealth comes predominantly from his ownership of his holding company Berkshire Hathaway’s stock. In short, CNBC was referring to the equity portfolio of Berkshire Hathaway.

Berkshire’s portfolio is the subject of immense scrutiny around the world and there is so much content covering Berkshire’s every move. Even Buffett writes an insightful analysis of Berkshire’s performance every year, which is published and released with a lot of fanfare. Warren Buffett and his partner Charlie Munger answer questions nonstop at their Annual General Meeting in Omaha every year in May. This event is attended by Buffett Fans from all over the world. In case you were not aware, Berkshire AGM is an extremely well Marketed Event where the portfolio companies of Berkshire sell millions of dollars of goods in a few days. So where am I going with this? I guess I am digressing here, so let me get back to the heart of the post as I still have not told you 2 things. “The 4 Stocks” and “The Challenge”.

The 4 Stocks are Apple, Bank of America, American Express and Coca Cola. These 4 put together make 71.6% of Berkshire’s portfolio.

Apple is the largest holding with a portfolio weightage of 41.47%. As you can see, the Berkshire portfolio has a clear and decent correlation (remember I wrote a Nano about Correlation a few weeks ago) to the Apple Stock. If Apple underperforms significantly, Berkshire is likely too and vice versa. It’s a very concentrated bet but I am sure there is a lot of conviction in Apple.

This reminds me of James Clear’s words “diversified enough to survive, concentrated enough to matter. The Berkshire portfolio seems diversified enough to survive and at the same time concentrated enough to matter.

Now that you know the 4 Berkshire stocks, let me come to “The Challenge” part.

Do you think most people can sit tight with their investments?

I am sure you know the answer to this question but the Challenge for you is in the following questions.

a. Can you really sit tight with your investments? Have you sat tight with your investments before?

b. Do you invest when you have the money to invest, or do you keep waiting for a correction?

I don’t know what you would do but I know what many did.

  1. Many exited their portfolios hastily or at a loss thinking the world is coming to an end. Did the world end? No but such events always transfer wealth from people who don’t understand risk to people who understand risk (I will be writing an insightful perspective on Risk next week). By the way, if the world was indeed coming to an end, then we have nothing to worry about, rather our portfolios should be the least of our concerns as we will surely have many other pressing things to address.
  2. Many are still waiting for corrections. One investor told me proudly, I got the exit right at the Sensex level of 40,000. When do you think he re-entered? At 55,000 with some portion of his money and still waiting with the rest. There were many 5%+ corrections in the last 12 months, but every time the thought was “Let’s wait for some more.” We can kid ourselves by saying that we got the call partially right but the ones who truly got it right were the ones who sat tight during the sharp fall last year and looked out of the window knowing that sooner or later things will be ok (It’s just that they didn’t know when things would be ok.). This is the attitude and mindset required to be an investor like Buffett.

By the way, you should know that Buffett himself has underperformed the US S&P 500 index in the last 5, 10 and 15 years. But that is not the point here.

No matter which portfolio (you have), your performance will always be driven by how you behave during times of excessive fear and during times of excessive greed.

Thus, the challenge for you is never about constructing a great portfolio. The challenge will always be about becoming a great investor.