There are various approaches to designing and managing a personal stock portfolio. Some approaches are more like a science, while others are more like an art.
A portfolio of stocks is more than the sum total of its contents. For most investors, it should have a clear overarching strategy and a certain amount of diversification. In addition, it should be combined with other asset classes for complete diversification.
Step 1: Determine your Goals
The first thing to do is determine the type of portfolio you want. A common theme that all dividend portfolios share is that they provide passive income, but even among portfolios with a dividend theme, there can be big differences.
Ask yourself:
-What kind of rate of return am I looking for?
-What is my risk tolerance?
-How experienced am I?
-How long until I plan to retire?
-How much time do I want to devote to stock research?
Step 2: Consider a Yield Target
Once your goals are determined, it’s helpful to have an average portfolio dividend yield in mind. The average yield should be substantial enough so that the portfolio truly receives the benefits that dividend-paying companies can provide.
As a general rule, people that plan to currently live off of their dividend income will want to seek higher yields while investors that are primarily focused on earning a good rate of return for several years should focus on achieving a high sum of dividend yield and dividend growth.
Step 3: Identify your Core Competencies
Nobody is an expert on everything, and yet investors should have a reasonably diversified portfolio. Identify a few sectors that you feel you have a solid understanding of, and use those as your primary means of diversification. If all of your stocks are too concentrated in one or two sectors, then a single unexpected macro-economic trend can dominate your portfolio. While I don’t recommend over-diversifying, it’s important to spread risk and reward into a few different sectors while remaining in your circle of competence.
Step 4: Socially Responsible Investing
Before you begin to buy shares of companies, it makes sense to develop a guideline or two about what sort of company you’ll let inside your portfolio. Maybe your view is that anything goes, and you’ll invest without social responsibility in mind. Maybe you’re on the other end of the spectrum, and will only allow companies that meet specific guidelines into your portfolio. Or perhaps you’ll have some sort of middle ground. In order to have peace of mind, it makes sense to develop a simple set of guidelines that are well-reasoned in your view.
Step 5: Research
After you have identified your goals, yield target, and comfortable sectors, it’s time to begin constructing the portfolio. The internet is a valuable tool in identifying worthwhile companies to invest in. Several services, including Google Finance, offer stock screeners that allow an investor to narrow down the search to companies that meet certain criteria such as yield thresholds or P/Es.
In addition, there are specialized sites out there to help you make stock selections. Sites like Morningstar can be of solid assistance to an individual investor. Sites like Seeking Alpha provide a ton of investor commentary and analysis. And of course, sites like this one and others constantly analyze individual stocks for readers. Ultimately, whatever investing decisions you make will be yours, and information from other sources can be helpful but should not be overvalued.
Step 6: Start Small
Once you’ve decided to invest in a company, there are a few ways to do it. Basically, there is a clumsy way and a more elegant way. The clumsy way is to take whatever capital you have available and buy that much worth of stock. The more elegant way is to start small, and enter your position over time. This allows you to average out your buy price over a given time period rather than going all-in on a single day.
Step 7: Finish Big
It’s useful to start small, but it’s important to finish big. What I mean is, once you’ve identified what you believe to be a good investment, and you’ve been buying up more shares, it makes sense to commit. Consider having a set of core holdings that you hold through all market conditions, a set of more cyclical companies, and lastly a set of smaller companies. Core holdings should have a wide economic moat, should exist in an industry that has good long-term prospects, and should have a strong financial position and be fairly resistant against recessions. Cyclical companies may have a lot of those good traits but will likely be more volatile. This volatility can be harnessed as you increase or diminish your position as economic conditions permit. Smaller companies are those that can provide more upside but need a little bit more attention. Become an “expert” on a few small caps that you know extremely well and follow closely.
When you identify what you believe to be an excellent investment, you’ve done your homework, and you have initiated your position over time and continually re-considered your reasoning and outlook for this company, don’t hold back. Make the position a meaningful size so that you can capture some serious value from your wise investment choice. Of course, always diversify, and don’t put all your eggs in one basket, but have some confidence.
Step 8: Prune and Grow
Buying and holding great dividend-paying companies is the path to wealth, but “buy and hold” doesn’t mean “set and forget”. Keep tabs on your stocks. It helps to write your reasons down for buying a stock in the first place, and then regularly check that your companies are still meeting your expectations. Make sure their dividends look as though they can be maintained, that the companies remain at reasonable valuations, and that the financial strength of the business continues to meet your requirements.
Step 9: Allocate Your Assets
In addition to maintaining a solid dividend portfolio, it’s important to complete your diversification by owning other asset classes such as bonds. One can also consider stocks that don’t pay a dividend, real estate, as well as options if that’s of interest to you. Owning investments in a variety of asset classes allows you to take advantage of the fact that different asset classes move inversely to one another, and it reduces your overall portfolio risk.
If the stock were to trade at 2x book, it would mean that investors are willing to pay twice the value of Berkshire's assets just to essentially have Buffett select stocks for them. I don't think 25% over book is too much to pay given Buffett's acumen and ability to get the best deals, but 1.63x book is, in my opinion, ridiculous. Especially when considering that Buffett is already 81 years old and he has no clear successor, if anything at all happens to Buffett, this stock will easily trade down to 1x book.
To be clear, is isn't that I think your strategy will not be profitable, as I believe the price to book ratio will probably converge to the long-term average over time, but I think the risk of it not happening outweighs the reward.
You are living in lala land if you think the break up value of BRK is less that twice its current price.
It is OK to treat his share as a mutual fund, the same we treat GE as one.
Any one has the stock performance (including any dividends) of the last 3 years?
1. Any increase in goodwill (i.e. intangible value in excess of tangible assets) since purchase isn't included in book value. Many of Berkshire's subsidiaries are so good that their true economic goodwill is now easily ten times the goodwill showing in the balance sheet.
2. Insurance float, while not owned by Berkshire is nigh-on permanent (in fact growing) capital and has maintained negative cost-of-float averaged over long periods. Provided you anticipate that zero-cost float is to be expected for decades to come (and I do, given the structural advantages at play) it makes sense to consider this as part of the capital that is at work earning money for Berkshire shareholders.
To my mind, therefore, Price to (Book Value + Float) is a better valuation metric that P/BV alone, and still understates IV (but only for a business of the quality of Berkshire).
Float at YE2010 was $65.8bn. With 1,648,000 class-A equivalent shares outstanding that amounts to
Float/share = $39,947
BV/share = $95,453
(Float + BV)/share = $135,400
Price/(Float+Book) ratio = 0.942 using Friday's closing price above.
This is still a crude metric, and it's far better to make a range of estimates of complete intrinsic value then demand a discount before purchasing, but I think it sheds some more light on what you're getting thrown-in for free at current prices.
BRK is more about supporting Buffett's ego rather than returning cash to shareholders.
I have never understood his thinking on this.
What's he going to do for his opus, take Exxon private?
No innovation, just ego stroking. At least his tax free foundation is supporting innovation.