Investors own too many stocks. Over-diversification plagues portfolios across the country as financial advisors throw everything but the kitchen sink at their clients' financial plans. The result is mediocrity. Just the other day I looked at one with not just one, but two WRAP accounts. Between them, they own 1989 stocks. What makes matters worse in this particular instance is the portfolio also holds Berkshire Hathaway (NYSE: BRK.A, BRK.B) "B" stock, itself a diversified company. Here's a cheaper way to create the ultimate over-diversified diversification portfolio.
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A Fund Of Funds
A simple way to create a diversified portfolio is to buy a bunch of insurance companies who've taken their excess premiums and invested them in other companies. Berkshire Hathaway's insurance subsidiaries, including GEICO, do it as do most others. The trick is figuring out which insurance companies to own.
Insurance companies eventually have to pay out those premiums in the form of claims made by policyholders from catastrophic events like hurricanes, floods, fires and other acts of Mother Nature. When this happens, profits fly out the window very quickly.
To counter this, in addition to the insurance companies consider buying an ETF or two that covers your bases. My preference would be to own the iShares MSCI EAFE ETF (NYSE:EFA) because it covers the world's major economies except the U.S., giving you a global portfolio with just four holdings.
Follow The Oracle
Warren Buffett's holding company has a large portfolio of businesses that it either owns outright or has a significant interest in. Its latest holdings report from June 30 shows Berkshire Hathaway owns shares in 41 public companies worth $49 billion. Right there you get a solid group of financial, consumer goods, energy and health care companies.
Many have made the case it's the only stock to own and it's hard to argue given Buffett's track record. Berkshire Hathaway is really a hybrid fund in that it is part private equity firm and part mutual fund. That's a potent combination.
Markel (NYSE:MKL), the niche property and casualty insurance company benefits from Tom Gayner, a value manager with a long-term track record that is better than most. Gayner's philosophy is similar to Ben Graham's, choosing to invest in companies with wide moats or margins of safety. Markel's book value per share increased 8% in the first six months of the year from $222.20 at the end of 2008 to $239.68 at the end of June; much of this due to gains in its investment portfolio.
Financial services account for 43% of the portfolio (down from 52% from 2008) and a large portion is in Berkshire Hathaway and Fairfax Financial (NYSE:FFH). Two of its largest holdings are CarMax (NYSE:KMX) and Diageo PLC (NYSE:DEO). It's going to take a long time for Americans to start buying new cars and until they do, the used-car market is going to be strong. Either way, CarMax is well positioned in the automotive marketplace.
As for Diageo, their brands are too strong to ignore. With sales and earnings up 15% and 6.6% respectively for the year ended June 30, consumers might be broke but they're still buying Johnnie Walker, Guiness and Smirnoff at a very respectable rate.
Loews (NYSE:L) has long been a favorite company of mine. Amongst the Tisch family's many holdings is property and casualty firm CNA Financial (NYSE:CNA); Loews owns 90%. Barrons ran an article in early August suggesting Loew's stock is currently trading at a 30% discount to its net-asset value. Why buy the operating company (CNA Financial) and its investment portfolio of 590 stocks, when you can get 90% of it for 30% off? Go to the source.
The Bottom Line
With just four stocks, you too can own a powerful portfolio that will make you rich instead of your financial advisor. Imagine that. (For more, read Do You Need A Financial Advisor?)
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