How Does Your Portfolio Compare to Warren Buffett’s?

Anyone who knows much about Warren Buffett, longtime CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), would probably love to have a portfolio like his — because it has performed so well. Over the 50-plus years that he has led the business, it has appreciated in value by an annual average of around 20%.

But Buffett’s portfolio includes not just common stocks that you and I can buy (though presumably the quantities differ) but also lots of entire businesses. Berkshire’s subsidiaries include the Benjamin Moore paint company, Dairy Queen International, GEICO insurance, Fruit of the Loom, See’s Candies, Clayton Homes, the McLane trucking company, and the entire BNSF railroad. Its stock holdings include major stakes in Apple, American Express, Bank of America, and Coca-Cola.

Image source: The Motley Fool.

Fortunately, there are ways in which you can tailor your portfolio to resemble Buffett’s more closely. Here are several questions that can help.

1. Have you stuck with companies you understand?

For starters, remain within your “circle of competence.” That’s a term Buffett has used many times, such as in his 1996 letter to shareholders:

You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

So if you know nothing about biotechnology or banking, think twice before devoting your hard-earned dollars to them, because there may be signs of trouble for any company or industry that you can’t appreciate. Always be sure that you have researched your potential holdings well and understand their advantages and risks, and how they make their money — among many other things.

2. Do you have some dividend-paying stocks?

Next, consider holding some or many dividend-paying stocks, as dividends can be powerful wealth builders. As of last year, Berkshire was collecting more than $3 billion annually from just four of its stock holdings. Its Apple shares alone generated $785 million in dividends for Berkshire in 2021.

We can get similarly impressive results with our own dividend payers. Imagine, for example, having a stock portfolio with a total value of, say, $400,000 — and an overall average dividend yield of 3%. That would kick out some $12,000 to you each year — and dividend payouts tend to be increased over time, so you might be receiving $15,000 in some later years, and even $20,000 or more at some point.

Remember, too, that when Buffett collects all that dividend income, he then puts it to work, as best as he can. He uses it to buy other companies, and more shares of stock. We, too, would profit by taking our own dividend income and spending it on more shares of stock. And once in retirement, we might use it to help support ourselves. That can help you not sell any or many shares of stock to raise cash after you’ve stopped working.

3. Do you have many or few holdings?

It’s also worth assessing just how many different companies you’re invested in. When it comes to stocks, Buffett recently had close to 50% of his portfolio in Apple stock alone, and more than 13% in Bank of America. More than 7% was allocated to both American Express and Coca-Cola.

He explained this kind of concentration in his 1993 letter to shareholders, noting, “We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”

Per Buffet, we shouldn’t all strive for plenty of diversification in our portfolios. He’s reported to have said: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” If we’re honest with ourselves, most of us are not exactly stock experts with a deep understanding of multiple industries. So spreading our money across many investments can make sense. Indeed, our Motley Fool investing philosophy suggests buying 25 or more stocks, aiming to hold them for at least five years. The thinking is that should give the holdings time to perform for you, and give you a decent chance of having one (or several) extraordinary performers.

4. Are you planning to hold for a long time?

Our suggested holding period of at least five years is consistent with Buffett’s thoughts on holding periods — though he’s on record as having said that, “[W]hen we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

If you’re invested in companies that you hold in very high regard, ones that you think can grow and grow and grow for many years, why sell when you’re up 100% or 200%? The best performers will grow by 1,000% and then perhaps 5,000% or more. You can make a lot of money through inaction — by not selling winners too soon.

Image source: Getty Images.

5. Are you invested mainly in index funds?

Finally, let’s admit that many of us don’t have the time or energy or interest to become active investors, reading deeply and broadly about investing strategies, companies, and industries. Fortunately, such people have an excellent way to invest: in low-fee, broad-market index funds. There’s little shame in that, as index funds have outperformed the vast majority of mutual funds actively managed by financial professionals over long periods. More specifically, fully 82.5% of large-cap stock mutual funds underperformed the S&P 500 over the past decade (as of mid-2021), and a whopping 93.8% of them underperformed it over 20 years.

Buffett has recommended index funds for the average investor — and even his wife. In his will, he offers these instructions for the money left for his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”

In a CNBC On the Money interview, Buffett noted that a low-cost S&P 500 index fund is the kind of investment “that makes the most sense practically all of the time.”

So there are five ways that you might model your investing and your portfolio after Warren Buffett’s style. Acting on some or all of them may not get you quite the same results as Buffett, but they could still improve your long-term results significantly.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Selena Maranjian owns American Express, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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