Over the weekend, Berkshire Hathaway reported earnings.
I’m sure you’ve read Vice Chairman Charlie Munger’s rants about Bitcoin.
It’s incredible to see Munger and Warren Buffett still at it.
They’re both in their 90s now.
And they’re still incredibly passionate about making their investors money.
Today, I thought I’d start with a classic Buffett story.
Then, I’ll show you the lesson of the story… and the exact stocks that you should consider owning.
The Oil Prospector Goes to Heaven
It’s always important to think for yourself as an investor.
Warren Buffett has always told a classic story about following the herd. It goes like this…
An oil prospector passes away and makes his way to heaven. Upon arrival, he ends up in line with hundreds of other oil prospectors at the Pearly Gates.
St. Peter is checking names at the gate, and this prospector is growing impatient. The line is not moving…
Suddenly, the crowd of prospectors disperses. People start running in the opposite direction of the gates.
The oil prospector gets to the front of the line and meets St. Peter.
St. Peter asks, “Why did everyone run off?”
The oil prospector smiles: “Well, I yelled that oil was discovered in hell.”
St. Peter then asks the oil prospector why he would like to be let into heaven.
After a minute of reflection, the oil prospector says, “You know. I’m going to join my colleagues to see if there is any truth to that ‘oil in hell’ rumor after all.”
How Should You Build Your Portfolio?
It’s very common for investors to buy stocks that they see in the headlines.
To join the herd. To get a sense of “missing out” and chasing the crowd.
If you turn on CNBC, you’ll hear pundits rambling on and on about Facebook, Netflix, Alphabet, and McDonald’s.
There’s nothing wrong with these companies. They’re great American companies.
But when they’re all you hear about, the prospect of “familiarity bias” creeps into your mind.
This means that you’ll only invest in “familiar” companies, the ones that so many other people own.
I’ve written extensively in my Money Talks with Keith column over the last few weeks on how to build a portfolio to weather any market. [You can read the first four parts of the series here: Part 1, Part 2, Part 3, Part 4].
If you only build a portfolio based on names you know, it can create all sorts of problems. These include overallocation to a specific sector and underperformance compared to benchmarks.
Of course, it’s not just what you see on television.
Where you live has a lot to do with how you invest.
A professor named Gur Huberman at Columbia Business School did a fascinating study about familiarity bias.
He found that in 49 of 50 states, investors were more likely to own shares of their local telephone company than any other phone company. Why? Because that was the company that they knew best in the sector.
It’s not just familiarity bias that investors need to avoid.
It’s following the herd as well, which Buffett addresses in his prospector parable.
Buffett has long invested in Apple and innovative tech companies. But he has also invested in some VERY boring companies. He has created a very unique portfolio across Berkshire Hathaway.
This portfolio can provide an optimal return. It can mitigate risk…
And… it can be very BORING, which is a good thing.
Berkshire owns a lot of shares of Restoration Hardware, which sells furniture.
Berkshire’s subsidiary BNSF is a freight operator that moves oil and corn across the continent.
Berkshire owns some of the most recognizable and mundane companies – all of which you’ll instantly recognize – including Duracell, Fruit of the Loom, and GEICO Insurance…
GEICO Insurance… is there anything more boring?
It also owns Business Wire for press releases, Acme Brick Company, a specialty insurance firm, and a candy company.
Berkshire’s portfolio isn’t contrarian.
But it’s structured to do one thing.
This portfolio offers incredible amounts of cash flow from many diverse industries and generates profits for its investors, which is exactly what I’ve been talking about via the portfolio thinking articles I’ve written (and referenced above).
EVERYONE these days wants to invest in the latest tech companies. People are pouring money into non-fungible tokens (NFTs), the FAANG stocks, and “space.”
But, you’ll never see Buffett or value-focused investors speculating much in these areas.
Buffett doesn’t lose money very often.
Boring Versus Speculative
At TradeSmith Daily, I’ve been giving our readers actionable recommendations when they emerge, as highlighted by the TradeSmith tools.
So, let’s briefly look at an example of buying boring versus buying into the hype.
How often do you hear about Virgin Galactic? People talk up the trend of space tourism constantly…
But how’s the stock doing? It’s extremely volatile. In fact, shares plunged more than 8.5% this morning.
Within TradeSmith, it has been in the Red Zone since early March, is in a side-trend and has a sky-high risk of 64.77%.
When TradeStops signals that a stock is in this situation, we don’t touch it. As I like to say, “the trend is your friend.”
So, while everyone else might be barking about what a bargain SPCE stock is…
We’ll sit back and avoid it. We’ll wait to see when and IF it returns to the Green Zone.
Meanwhile, how excited are you to own a company like… H&R Block? This is a company that sells tax software.
Can it be any more boring?
But guess what? It’s tax season. Its retail locations are opening up after COVID, and its software throws off gobs of cash flow thanks to monthly subscriptions.
In addition, it has been in the Green Zone for more than three weeks, is in an uptrend, and has a medium risk of 28.55%. Our Platinum users can see that the latest addition to our program, Ratings by TradeSmith, has it at a Strong Bullish level. (And while I’m talking about TradeSmith signals, our Timing product is showing HRB in a valley area, signaling an ideal time to buy, until May 14.)
Since TradeStops flashed a buy signal on April 6, shares have traded in the $22 to $22.50 range. But it pays a solid 4.6% dividend.
I’m happy to buy into those boring companies. They reduce likelihood of a concentrated exposure within a single sector.
It also allows us to build a more balanced portfolio that includes different consumers, cash flow, and commerce.
Best of all, I sleep better at night. I’ll be back tomorrow to discuss more on the topic of cognitive bias.