There is one major secret of the Warren Buffett stock portfolio. Other investors often overlook this factor, but it has probably been the most critical contributor to the investor’s success over the past few decades.
When combined with his stock-picking skill, this factor has helped the billionaire investor achieve the outstanding return he has today.
The Warren Buffett stock secret
Over the past few decades, thousands of individuals have tried to crack Buffett’s secret. They have been looking for a code or formula that could help anyone replicate Buffett’s success with minimal effort.
Unfortunately, these efforts have not yielded any results. That’s probably because Buffett’s success cannot be boiled down into a straightforward formula.
A few key holdings make up the foundations of the Warren Buffett stock portfolio. At the time of writing, the top four holdings are Apple, Bank of America, Coca-Cola and American Express. It is mistakenly believed that he picked out these companies decades ago as fantastic businesses and rode them to success, shunning every other company.
While there are elements of truth in this, it does not tell the whole story. Yes, Buffett did pick out these businesses for their growth potential, but he has owned many thousands of other companies as well.
According to the research paper, Buffett’s Alpha by Andrea Frazzini, David Kabiller, Lasse Heje Pedersen, between October 1976 and March 2017, Warren Buffett’s stock portfolio at Berkshire Hathway contained over 2,000 different equities.
The reason why legacy holdings such as Bank of America, Coca-Cola and American Express (Buffett only started buying Apple in 2016, so it wasn’t relevant to the study) rose to the top of the portfolio over other holdings is twofold. Firstly, these companies achieved strong growth rates, and secondly, Buffett held on.
This is the Warren Buffett stock portfolio secret. Investing is tough, and the chances of finding a company that will perform well for the next few decades today is virtually impossible.
However, investors don’t have to pick winning companies today. A portfolio can always be changed. The flowers should be watered, and the weeds removed. Companies that are performing well and building shareholder equity, should be held—others may need to be sold.
Water the flowers, remove the weeds
Buffett’s Berkshire has owned thousands of equities throughout its lifetime. It’s no mistake that some of its best investments are the largest holdings in the portfolio today. Buffett has sold losers and held on to his winners. He’s been doing this for decades.
When he bought Coca-Cola, it could have just as easily been a failure as it was a success.
There are plenty of examples of his considerable investments that haven’t worked out. Tesco, IBM and Conocophillips, all turned out to be failures.
In each situation, Buffett sold the businesses and moved on. In the case of IBM, he sold this struggling company and moved onto Apple. That was a tremendous success.
It is essential to acknowledge the failures as well as successes as an investor. Failures and losses should never be overlooked or disregarded.
They are an integral part of the learning process.
Selling an investment at a loss should never be considered to be a mistake. It should be viewed as an opportunity. That’s new capital which can be deployed into a different investment.
That’s one of the great things about being an investor in public equities.
There’s never any obligation to stay with a stock. More importantly, there’s never any obligation to invest in a business in the first place. If something is not working out, that’s fine. It could be time to move on and find a different opportunity.
Following this mentality has helped Buffett build his fortune over the years and put him in today’s position. He’s focused on the winners and disregarded the losers. He’s let the winners run and cut out the losers, watering the flowers and cutting the weeds.
That’s why the top holdings in Berkshire’s portfolio stand where they are today. These are the winning businesses out of the 2000+ Berkshire has owned over the past few decades. Buffett has left them alone and allowed them to grow.
That’s the secret of the Warren Buffett stock portfolio.