What if you could only buy one stock? The question sounds crazy. Really? Just one stock?
Yup. That’s exactly what my grandfather did in the early 1980s when he bought his first stock. That company was oil and gas giant Exxon Corp.
His reasons were simple. After the oil crisis of the 1970s, oil prices were high and demand was increasing.
Oil was a commodity the world would always need, and Exxon was the world leader. The company pumped oil from all corners of the world, satisfying the insatiable demand for oil.
One of the key reasons he loved Exxon was the dividend. Even back in the 1970s – long before it merged with Mobil Corp. to form Exxon Mobil (NYSE: XOM) – Exxon was considered to be one of the best blue chip dividend stocks.
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My grandfather was a smart man. But he wasn’t rich.
He could have bought many other great companies of the time. A blue chip stock such as General Electric (NYSE: GE) or Merck (NYSE: MRK) would have been great choices.
When he decided to invest in the stock market, he bought just one stock. He realized that owning one great stock was far more important than owning many decent stocks.
Fast-forward 35 years. Today, we live in a world of mutual funds and ETFs. Everyone talks up the benefits of diversification. We’re told that owning lots of stocks reduces risk, since our eggs are spread among many baskets.
That’s absolutely true. Owning 100 stocks means that even if one stock falls 50%, the overall impact to the portfolio is tiny. In fact, it would have a negative impact of just 0.5% on the overall portfolio.
But the opposite is also true. A diversified portfolio also limits upside gains. Consider an example with the same portfolio of 100 stocks. If you pick an all-star stock and it doubles in price, your overall portfolio only gains 1%.
Some of the best investors in the world prefer to have a highly concentrated portfolio. This means they invest a large portion of their capital in their favorite stocks.
Warren Buffett has been using this strategy for years. In fact, the Oracle of Omaha is quite comfortable having a huge portion of his holding company’s stock portfolio allocated to a single stock. Just take a look at Berkshire Hathaway’s (NYSE: BRK-B) top four stock positions.
Berkshire Hathaway Top 4 Holdings
Source: Berkshire Hathaway Q1 2015 13F filing
That’s right: the top four stocks in Warren Buffett’s portfolio equal 62% of the portfolio. You can discover Buffett’s other top stock picks by clicking here now.
You have to remember that the average mutual fund owns more than 100 stocks. And most mutual fund managers would be fired for having more than 10% of their portfolio invested in a single stock. That’s because their rules strictly prohibit holding large positions.
Warren Buffett knows that investing large amounts of money in his favorite stocks is the right thing to do. Yet most investors have failed to learn this lesson.
My grandfather followed this approach in his portfolio. He was perhaps excessive: Exxon accounted for more than 80% of his stock portfolio. He was smart and lucky, and timed his investment nearly perfectly.
Exxon Mobil is a rare breed of company that I call a “Forever Stock.” I’d like to let you in on a simple approach to buying the best companies in the world … and crushing the market over the long term.
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