Buffett's "Big Four" Sleep-At-Night Portfolio

Perhaps the best advice Warren Buffett gave to investors was his "punch card" argument.

Put simply, Buffett argued that an investor at the start of his or her career should be given a punch card with only 20 holes in it, limiting the number of investments that can be made. Yes, only 20 investments allowed over an entire career. 

By being limited to 20 investments over a career, Buffett an investor would weigh the outcomes of his decisions more carefully. Not only would performance be enhanced, but the risk taken on would also be greatly reduced.

Buffett certainly adhered to that philosophy on his journey to becoming one of the richest people on the planet. Much of his billions can be attributed to just a few great investments. (My colleague, Amy Calistri, explains the multiple benefits of Buffett's argument in this recent article.)

One that really sticks out is Buffett's investments in American Express (NYSE: AXP).

As a result of the infamous "salad oil scandal" in 1964 -- where the company was on the hook for guaranteeing $150 million of collateral for loans which didn't exist -- American Express shares were clobbered. The company's potential liability sent investors running for the hills. Its stock dropped more than 50% costing the company nearly $58 million.

While everyone was pulling out and cutting their losses, Buffett saw it as a golden opportunity. He believed the fears over the eventual liability were overblown, and he made a big concentrated investment in American Express. 

In fact, Buffett actually changed his investment rules inside the Buffett Partnership, increasing the amount he was allowed to put into one position to 40% in order to fully exploit the opportunity. Prior to American Express, Buffett had promised investors that no single investment would make up more than 25% of the Buffett Partnership.

Obviously, Buffett was making a huge commitment, based on his belief in the strength of this one company. And within two years Buffett more than doubled his money on American Express, leaving his previously skeptical investors in awe.

Indeed, the fundamentals behind American Express's success have stood the test of time, through market highs and lows. And today the shares still make up almost 12% of Berkshire Hathaway's $117 billion portfolio.

I believe right now is a crucial time to follow Buffett's lead...

We are now five years past the most recent stock market crash. In early March 2009, the S&P index was at an all-time low of 666 (eerie right?), but has since then tripled.

It seems as if the stock market has had nowhere to go but up, making the past five years easy on investors. But the next five are likely to be more difficult.

Many of the stocks that have had the best run since the market bottom are the ones with smaller capitalizations, creaky business models, or weak balance sheets. You've probably heard the phrase: "A rising tide lifts all boats." 

When the inevitable market correction comes, though, these are also the stocks that will fall the furthest. Now, at the end of a terrific five-year run, it could be the time to (like Buffett) concentrate wealth in quality.

I'm not suggesting that we should just try to be like Buffett. I'm saying we should concentrate our portfolios where Buffett has concentrated his.

The man has 55% of his company's $117 billion portfolio in four incredibly high quality stocks. These are stocks that have proven to hold up well in a more difficult stock market.

Here's a breakdown of Berkshire Hathaway's holdings in these four dominant companies:

Company Shares (millions) Cost (billions) Value (billions) % of Portfolio Yield
           
Coca-Cola (KO) 400 1,299 16,524 14.06% 3.00%
Wells Fargo (WFC) 483 11,871 21,950 18.68% 2.70%
American Express (AXP) 151 1,287 13,756 11.71% 1.10%
IBM (IBM) 61 11,681 12,778 10.87% 2.40%
           
Total   26,138 65,008 55.32% 2.38%

Stock #1 Coca-Cola (NYSE: KO)

Buffett amassed Berkshire's position in Coca-Cola over a three year span in the late 1980s and early 1990s. According to Buffett, a competitor couldn't damage the moat around the Coca-Cola brand with an unlimited budget.

Stock #2 Wells Fargo (NYSE: WFC)

How much does Buffett love Wells Fargo? Let me count the ways. Almost $22 billion of them, which is the number of dollars that Buffett has invested in the bank on behalf of Berkshire. This is the most money that Buffett has ever invested in a publicly traded stock.

Buffett's love for Wells Fargo stems from its huge, stable, low cost deposit base which is a massive competitive advantage.

Stock #3 American Express (NYSE: AXP)

Yes, Buffett still holds American Express after all of these years. Berkshire's initial investment of $151 million has turned into $1.2 billion.

Like Coca Cola, American Express has a dominant global brand that allows it to compound equity at very prolific rates. And what American Express can't reinvest at high rates of return, the company returns to shareholders through dividends and share repurchases.

Stock #4 International Business Machines (NYSE: IBM)

Everyone was surprised when Buffett announced that he had invested $12 billion in a technology company. But Buffett sees IBM as more of a services firm than a hardware tech company at this point.

Of all of his big four, investors today can purchase IBM closest to Buffett's average original investment.

I think investors would do well to follow Buffett's lead and trim exposure to small and low quality companies and focus instead on Buffett's big four. In any sort of stock market retreat, these stocks are likely going to hold up much better than the market. And today is the time to focus on quality.

Risks to consider: If the raging bull market continues these large cap companies could temporarily trail the overall indices.

Action to take --> Buy shares of Buffett's big four and sleep well knowing that in a more difficult stock market these could be the best companies to own.

Warren Buffett and his company have made billions from these four stocks over the years. Now could be the perfect time to follow his lead...

What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for trying out a new card.Wh...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hotel stay each year, ther...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the selling price (that's $18...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com. Being in credit card debt is the pits. I've bee...
If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But with the economy improving...
If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly adding to mortgage loans ...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've definitely got the right thinkin...